The Freeman 1975 · gerly for something they want more. Catering to Weakness Totalitarians of all...

the

FreemanVOL. 25, NO.9. SEPTEMBER 1975

Is Freedom High- on Today's Agenda?Freedom, alas, is more often given away than taken away.

On Feeding the WorldTo bleed America will not feed the world; look to freedom.

Alla,n C. Brownfeld

Dick Beeler

515

522

Shop Talk Edson I. Ga.ylord 524The president of a prospering enterprise speaks with employees about competitionand how to meet it successfully.

Wages, Unemployment a~d Inflation lUdwig von Mises 529The wage earner, like every other citizen, is firmly interested in the preservation ofthe dollar's purchasing power.

The School of MankindThe power of example in teaching and learning.

leona.rd E. Read 537

The Government's Energy Crisis Eugene Guccione 541What government has done to cause the energy crisis and why we'd best look to themarket for a cure.

The Tollway to Nowhere Robert C. Moore 550How regulations and controls have created and are prolonging the energy crisis.

land Use Regulation Harms the Poor Bernard H. Siegan 557Those who aim to help the poor by restricting growth create problems.

Blue Eagles and Deja Vu Wa,lter B. Wriston 560"We are not to expect to be translated from despotism to liberty in a featherbed."

ANew Kind of Politician Davi~ A. Williams 567What would he do for the people? "Absolutely nothing."

The Gold Standa,rd and Fra'ctional-Reserve Banking Joe Cobb 569The problem lies in the law declaring paper to be legal tender.

Book Review:"Gold is Money" edited by Hans F. Sennholz

Anyone wishing to communicate with authors may sendfirst-class mail in care of THE FREEMAN for forwarding.

573

tlle

FreemanA MONTHLY JOURNAL OF IDEAS ON LIBERTY

IRVINGTON-ON-HUDSON, N. Y. 10533 TEL: (914) 591-7230

LEONARD E. READ

PAUL L. POIROT

President, Foundation forEconomic Education

Managing Editor

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Standard and Fractional-Reserve Banking."

Is

~ . ~~tt\l\\\t\ High on,\\:' Today's

I "'a<J7ff?ii Agenda?

ALLAN C. BROWNFELD

IT. IS SAD, but may be true, thatmany, perhaps most, Americansreally do not care very much aboutbeing free.

Two candidates for public officerecently told this writer that whenthey advocated a policy of the leastcoercive kind of government, theywere rebuffed by the voters.

One of these men was JohnHospers, the Libe,rtarian Partycandidate for President·· in 1972.When voters asked, "If. you alreelected, what will you do for me?"he responded: "I'll leave youalone." The other man, MichaelFeld, a Republican, was running

Mr. Brownfeld of Alexandria, Virginia, is afree-lance author, editor and lecturer especially interested in political science.

for Congress in Iowa. When hewas asked the same question inDubuque, he responded· that, "I'lldo my best to see to it that thepeople .in this city run their ownaffairs, and a,re not told what to doby bureaucrats in Washington."Neither Mr. Hospe,rs' audience northat of Mr. Feld were interestedin being left alone. What theywanted was, unfortunately forfreedom, far different.

Much the same happened whenthis writer ad.dressed a, group, ofhigh school students visitingWashington, D. C. from RhodeIsland. When they were told thatthe Founding· Fathe,rs were suspicious of government, and fearfulof the centralization of power, the

515

516 THE FREEMAN September

young people were mystified. "Doyou mean to say," one asked, "thatwe should not have faith in ourpoliticians and should not look togovernment for the answer to ourproblems?" Such an. idea - the traditional American idea of freedomand carefully limited governmentalpower - had never really occurredto these students. One wonderswhat is being taught in the schoolsof Rhode Island. Unfortunately, itis the same philosophy of dependence upon the state which seemsto he the common program ofmuch of our public education. Andwhy, after all, shouldn't statesupported schools seek to fosterdependence upon the state? Itseems to be in the nature of things.

The fact is that more aspects ofour lives than ever before are subject to the intervention of men inWashington, some elected, someappointed. We are to;Id by them tobuckle our automobile s~at belts,to hire given percenta.ges ofwomen and selected minoritygroups, to answer intimate questions on census forms and to turnover ever larger portions of ourincomes in the form of taxes andsocial security levies. The government keeps files upon us, sometimes spies upon us, ,and is alwaysready to tell us wha~ to do - always, of course, "for our owngood."

A generation ago the great

economist Joseph Schumpeter described the performance of intellectuals, politicians and others whosought to expand governmentpower at the expense of individualfreedom and of traditional rightsto private property this way:"Capitalism stands its trial beforejudges who have the sentence ofdeath in their pockets. They aregoing to pass it, whatever the defense they may hear; the only success victorious defense can possibly p,roduce is a change in theindictment."

Thus, while the issues maychange, the answer is always thesame: an increase in the power ofthe state and a diminution in therights of individual men andwomen.

For the Good of Society

Today those who seek to expandstate power say that they 'are doingthis in the name of ecology, of theenvironment, of zero populationgrowth, and a host of similareuphemisms for a planned andcontrolled society. They proposelegislation which will tell individuals what they may do on and withtheir own property. They proposetax legislation which would includepenalties upon those, having morethan the legally mandated numberof children. They propose environmental standards which wouldlimit growth and, as a result, re-

1975 IS FREEDOM HIGH ON TODAY'S AGENDA? 517

duce the expansion of business,industry, and jobs.

Long ago, Justice Louis Brandeis declared that a nation's freedom was never taken from it "except for a good reason." Thosewho wish to limit freedom at thepresent time have many "goodreasons" for their actions. Theaverage citizen, unfortunately, isnot aware of the consequences ofthese proposals and,as a result,becomes their naive supporter anddefender.

More and more, Americans arebecoming subjects rather than citizens. Many don't realize it. Manywho do, don't mind it.

After all, Capitol Hill is filledeach day with men and womenwith their hands out for what theylike to think is "federal money."They are farmers, veterans, teachers, businessmen, welfare recipients - each one wants a government subsidy fo·r his own particular group. In return for such government subsidization, they arequite willing to submit to government rules and regulations. Forthem, freedom is simply the asking price for a form of guaranteedsecurity. Many are eager to pay it.

The illusion which those whocare about freedom have operatedunde·r from the beginning wasthat such freedom would be takenfrom them either by demagoguesat home or tyrants abroad. It is,

of course, necessary to guardagainst both of these very realphenomena. This, however, remainsa somewhat mythical construction, for the real world does notwork quite that way. Freedom israrely taken from men and womenwho are jealous of it. Quite to thecontrary - they give it away eagerly for something they wantmore.

Catering to Weakness

Totali tarians of all sortswhether Nazis or Fascists or Communists - understand this flaw inhuman nature very well, and theyplay upon it very effectively. TheNazi spokesman Goebbels declaredthat, "To be a socialist is to submit the I to the thou; socialism isa sacrificing of the individual tothe whole." Sacrificing the individual and reducing him to a bit ofdust, to an atom, implies, according to Hitler, the renunciation ofthe right to asse·rt one's individual opinion, interests and happiness. The individual, under such asystem, ceases to be important.Hitler declared that, "The individual renounces his personal opinion and his interests." Hitlerpraises "unselfishness" and teachesthat "in the hunt for their ownhappiness, people fell all the' moreout of heaven into hell." It was theaim of education in Nazi Germanyto teach the individual not to as-


sert himself. Precisely the same istrue of education in the Soviet Union and in Communist China.

Freedom begins to be lost themoment the "public interest" re~

places what an individual believesto ,be the truth and the wishes ofthe group, assume an authoritywhich cannot be rebuked. In hisimportant book, E'scape FromFreedom" Erich Fromm notes thatin the course' of modern history theauthority of the Church 'has beenreplaced by that of the State andtoday is being replaced as well "bythe anonymous authority of ...public opinion. Because we havefreed ourselves of the older, overtforms of authority, we do not seethat we become the prey of a newkind of authority. We have becomeautomatons who live under the illusion of being self~willing individuals ... The loss of the self hasincreased the necessity to conform,for it results in a profound doubtof one's identity ... if we do notsee the unconscious suffering ofthe average, automatized person,then we fail to see the danger thatthreatens our culture : the readiness to accept any ideology and anyleader, if only he promises excitement ... and, offers meaning andorder to an individual's life."

While we often declare that individual freedom is of the highestpriority, and wonder why statepower continues to, grow at its ex-

pense, and why so few are concerned - this very anguish we feelmay indicate that we do not possess a proper understanding ofwhat is happening. It is not politics, or economics, or historywhich may really be at work, buthuman nature itself.

Precious to Whom?

The, French philosopher Bertrand De J ouvenel, in his classicwork On Power, points out that wefrequently say that "Liberty is themost precious of all goods" without noticing what this formulation implies in the way of socialassumptions.

He writes that, HAgood thingwhich is', of great price is not oneof the primary necessities. Watercosts nothing at all, and bread verylittle. What costs much is something like a Rembrandt, whichthough its price is above rubies, iswanted by very few people, and bynone who have' not, as, it happens,a sufficiency of bread and water.Precious things, therefore, arereally desired by but few humanbeings and not even by them untiltheir primary needs have beenamply provided. It is from thispoint of view that liberty needs tobe looked at ... the will to be freeis in time of danger extinguishedand revives again when once theneedof security has received satisfaction. Liberty is in fact only a


secondary need; the primary needis security."

Yet, Americans live in the mostprosperous and secure society inthe history of the world - but aresacrificing freedom for what theyperceive as "security" at an everincreasing rate. Unfortunately,many predicted that democracywould produce this result.

Macaulay to Randall

Thomas Babington Macaulay,writing to Henry Randall'in 1857,lamented, "I, have long, been convinced that institutions purelydemocratic must, sooner or later,destroy liberty or civilization orboth. In Europe, where the population is dense, the effect of suchinstitutions would be almost instantaneous . . . Either the poorwould plunder the rich, and civilization would perish; or order andprosperity would be saved by astrong military government, andliberty would perish."

Macaulay, looking to America,declared that, "Either some Caesaror Napoleon will seize the reins ofgovernment with a strong hand;or your republic, will be as fearfully' plundered and laid waste bybarbarians in. the 20th century asthe Roman Empire was in theFifth - with this difference - thatyour Huns and Vandals will havebe-en engendered within your owncountry by your own institutions."

There is much discussion todayabout "equality" by men and women who do not understand that liberty and equality are, in fact, twodistinct and diametrically opposedconcepts. They would do well toconsider the analysis of Alexis deTocqueville in Democracy in America:

"I think that democratic communities have a natural taste forfreedom; left to themselves theywill seek it, cherish it, and viewany privation of it with, regret.But for equality, their passion isardent, insatiable, incessant, invincible; they call for equality infreedom; and if they cannot obtainthat, they still call for equality inslavery. They will endure poverty,servitude, barbarism - but, theywill not endure aristo~racy."

As if shattering the dream ofthe Founding Fathers, Tocquevilledeclared that, "Democratic nationsoften hate those in whose handsthe central power is vested; but theyalways love that power itself. I amof the opinion, in the democraticages which are opening upon us,individual independence and localliberties will ever be the produceof artificial contrivance; that centralization will be the natural formof government . . . Americans areso enamored of equality that theywould rather be equal in slaverythan unequal in freedom."

Discussing the growth of cen-


tralized power in the United States,a country created by men whofeared such centralization and attempted to write a Constitutionwhich would prevent it, De Jouvenel declares that, "America wasa country which was a stranger tocompulsory military service, inwhich the tradition was to electofficials to office, and in which Power was subject to judicial control.Is it not astounding that Powerwas able in a few years to reducethis control nearly to the vanishingpoint, to build up a vast bureaucracy, and to invest this bureaucracy with such wide powers that anumber of federal agencies havebeen established simultaneously toformulate rules, to apply them, andto punish breaches of them - toact, in other words, as legislator,executive and judge1"

De Jouvenel concludes that, "Thestate, when once it is made thegiver of protection and security,has but to urge the necessities ofits protectorate and overlordshipto justify its encroachments. Bismark realized long ago that thiswas the road which led to enlargedauthority."

Whether governments are elected by a majority of citizens, or areelected by no one, tells us simplyhow they are constituted, not howpower is exercised or whether ornot freedom of the individual isprotected. The fact that Ameri-

cans, once in four years, elect aPresident, or once in two yearschoose a member of the House ofRepresentatives, should not confuse the fact that government power is, nevertheless, arbitrarily imposed. After thE1; depradation of theFrench Revolution, Clemenceausaid that "Had we expected thatthese majorities of a day wouldexercise the same authority asthat possessed by our ancientkings, we should but have effectedan exchange of tyrants." Clemenceau's words seem to echo thosespoken by William Pitt, Earl ofChatham on Janua.ry 9, 1770: "Areall the generous efforts of our ancestors ... reduced to this conclusion, that instead of the arbitrarypower of a king we must submitto the arbitrary power of a Houseof Commons 1 If this be true, whatbenefits do we derive from the exchange 1 Tyranny is detestable inevery shape; but in none as formidable as when it is assumed andexercised by a number of tyrants."

Freedom and individualism seemnot to be natural to man, but mustbe carefully cultivated and taught.The American society is failing inthis task - and the future of American liberty hangs in the balance.

Total power over the lives of individuals is worst when that totalpower is exercised in the name ofthe majority of citizens organizedinto a powerful state. Lord Acton


declared that, "It is bad to be oppressed by a minority, but it isworse to be oppressed by a majority. For there is a reserve of latent power in the masses which, ifit is called into play, the minoritycan seldom resist. But from the-absolute will of an entire people,there is no appeal, no redemption,no refuge but treason."

Freedom, unfortunately, doesnot seem to be high on the American agenda at the present time.Dnless that agenda changes, thefuture for freedom is bleak. It willnot, it seems, be taken from us byeither force or subterfuge. If welose it, it will be because we havegiven it away. The fault will beentirely our own. ,

IDEAS ON

$LIBERTY

I'll Respect Your Life

AMONG PEACEFUL PERSONS who have individually recognized the

morality and wisdom of volunteering unilaterally not to kill, notto steal, not to injure another deliberately, there would be no need

for government if everyone were capable of living according to hisgood intentions. Yet, within a society primarily comprised of

property-respecting, peaceful persons, individuals make mistakes;and there is a place for an organized agency of force with sufficient

power to suppress or discourage any errant threat to life or property. One may solemnly pledge not to break the peace himself and

yet consistently advocate a government police force strong enough

to overcome and subdue him if in a moment of rashness he shouldforget or violate his pledge. Self-control is a most difficult thing; a

properly limited government is a form of organized self-controland may be helpful in that limited role. But when governmentexceeds that very limited purpose and begins placing barriers be

tween willing buyers and sellers, it then becomes the positive evil\ve know as socialism and all of its variations. When anyone triesto make a deal to respect your life if you'll respect his, tell him toforget it - but respect his life anyway, because it is the right thingto do.

PAUL L. POIROT

DICK BEELER

On Feeding the World

The topic of the day is world starvation.Convention speakers, theologians, concerned citizens, newspaper

columnists, TV moralists, classroom lecturers, civic leaders, controlled parents, social engineers, symposium panelists, and longrange planners are all up to their ears in it.

The representatives of 140 nations, at the 1974 World FoodConference in Rome, concluded that somewhere between 400 and800 million members of the human family are starving.

They say 71 percent of world population is too poor to buy itsminimum food requirements.

While there is indeed a shortage of food, there is no shortage ofideas on what shquld be done about it. Most of them involvegovernment restrictions and regulation, and none is going to solvethe problem. They've all been tried.

Perhaps that is the most horrifying thought of all. We seem tobe tooling up for a flock of projects that will bleed America white,and in the long run just make the things worse.

Governments do not produce food. Neither do religions orhumanitarian organizations.

Only farmers produce food. And American farmers are farbetter at it than any other farmer anywhere.

One does not make good farmers simply by sending out a supplyof implements and seeds, or huge quantities of fertilizer.

Good farmers cannot even be created by massive educationeffort, development of new crop varieties, or running young peoplethrough the jungles and deserts with the latest agronomic gospeland birth control gadgets.

It cannot be done by providing stop-gap food supplies until they

1975 ON FEEDING THE WORLD 523

"get on their feet." In the past 20 years, the rich United Stateshas proven that by giving more than $25 billion in food to poornations, but today world sta.rvation is worse than ever.

Any of those suggestions may help, but none will really work.Even if we put them all together they will fail. Something is stillmissing. That something is the priceless ingredient it takes tomake a good farmer.

A good farmer is an individual human being. He responds tostandard human incentives and he produces well only when he hassomething to gain personally from it.

The American farmer is a great producer because he has theassurance that what he earns will be his, and that at least for themost part it cannot be taken from him.

Without such assurance he would not be a great producer - nomatter how much technology, machinery, fine soil, climate, fertilizer or other requisites were put at his disposal.

Moreover, the American farmer works within an economicsystem which ,consists of other individuals with similar incentivesand assurances. He is closely dependent upon many fellow Americans who respond in the same way he does. They produce not onlythe supplies, equipment -and services he needs to farm, but alsomuch of his personal incentive. That incentive is in the form of amarvelous array of products he can acquire for his own enjoymentif the fruits of his labor are sufficient to trade for them.

In a word, he is a great farmer because he is part of a greatsystem of free individuals.

farmers in other parts of the world are no less individualhumans than they are in America. Put them in the same systemand they will produce the same way. The fact that many greatAmerican farmers came from backward countries proves the point.

Conversely, if we were to isolate a };lighly productive Americanfarmer in one of the underdeveloped countries, away from thismarve~ous system and incentive, he too would fail.

And, incidentally, it would not be necessary to deport theAmerican farmer to a foreign land to deprive him of the systemand the incentive he requires.

That can be done here. ~

Mr. Beeler is Executive Editor of California Farmer. This article is reprinted by permission from his editorial in the December 1974 issue of Agrichemical Age.

ShopTalk

k To The Employeesachine Company, Rockford, Illinois

lord, Chairman & PresidentJune 10, 1975

WHEN I TALKED with you last October 24, I told you that 1974 at Ingersoll was a good year; that wehad made all the shipments we hadpromised customers; the quality ofour work was good and the company was making profits - andusing those profits to get in thebest shape possible for the future.At that time, the results for theyear were not final and I promisedto report to you again when theywere.

On the 28th of April, I reportedthe results of 1974 "officially" toboth the Directors and the Stockholders of the company. I want totake this opportunity to tell youwhat those official results were

and also to give you as much information as I can about 1975 and1976.

I will talk only about the resultsof Ingersoll's Rockford operations;not those of our overseas companies. It is enough to tell you thatour overseas companies are alloperating profitably, that they toomade their shipments on time in1974. Our three companies locatedin Germany and our Europeanconsulting group now representabout 40% of the total company,and are of great help to Ingersollas we grow and meet new customers and new competitionaround the world.

In our Rockford operations in

1975 SHOP TALK 525

1974, our shipments were $52,300,000. That is a record for the company in any year. This $52 millionis the only income that Ingersollreceived during 1974.

Of that amount, we paid $23,410,000 for materials (such assteel plate, and tools) and services(such as electricity and tele-phone). And we paid $23,298,000for the total payroll.

I know it is hard to keep thosefigures in your head - let me simplify. We received $52 million.This is all the money we took in.We paid out $23 1h million to outside firms and just a little lessthan that to the men and womenwho work here. These two itemstotal about $47 million. The difference between this $47 millionand the $52 million we receivedfrom customers is our profit. Actually, it was $4.9 million. We normally pay 50 % of this to the government as "corporation tax." Lastyear it was less because of lossesin previous years.

All of the profit was reinvestedin the business - almost $3 millionin new machines alone. In thesame way, all the profits from ourEuropean companies were reinvested in those plants.

To repeat, the total companypayroll for all the men and womenwho work here was $23,298,000.We paid this amount, but you didnot receive it; because we are' re-

quired to withhold income and social security taxes before you getyour pay check. Of the $23,298,000that you earned, $5,933,000 waswithheld and your checks totaled$17,365,000.

I report this way because I wantto talk for a minute about taxes. Itseems to me, as I talk with youindividually from time to time,that we tend to forget how muchof our pay is withheld for taxes.All of us together earned over $23million in 1974, but we only saw$17 million of it. The rest of itwent to the government.

In addition, the company payscorporation taxes, and other taxes,which we must take from the selling price of our machines. We passtaxes on to our customers in theselling price just as they do totheir customers. Ford and GeneralMotors, for example, pass their"corporate" taxes on to their customers, and so, you can see, thatwe, as car buyers, pay these taxestoo.

Politicians would like to have usforget that the vast majority ofall the money taken in by our government comes from p,eople likeall of us gathered here, who workfor a living. They would like usto forget that we've paid so muchin taxes, so they arrange to deductit from our checks every two weeksand hope we will get used to the


idea of getting paychecks anywhere' from two-thirds to three..quarters of what· we have actuallyearned and what the, company paidus.

They would also like to ha,ve usbelieve that corporation taxes arepaid by corporations. Corporationsdon't pay taxes., only people pa..ytaxes. Taxes are p,assed along inthe price of goods until they cometo rest when people buy things.But it sometimes is easier for apolitician to recommend a biggerbite on the "big corporation" thanto raise our individual taxes. So heraises taxes on the oil companies,for example - "surely, they canafford it!" The truth is; we paythat tax, too - when we buy gas.

At times, they would like us tobelieve that wealthy people paymost of the taxes. Politicians continually refer to the "loopholes" inthe tax structure and indicate thatall we have to' do is find a way totake more money from the richand everything will balance out.They're putting us on! The moneycollected from all the wealthy people in this country is not enoughto run the government for a week,at the present rate of spending.

There is still another funnyidea around. It has names like"Federal Funds," "Revenue Sharing," and "Matching Funds." Theidea seems to be that we can havegoods and services here in Rock-

ford and have somebody else payfor them. If we want a civic center, for example, but cannot raiselocal taxes to cover the cost, wewill get these funds from "thegovernment." Since the governmentproduces .nothing, and has nothingexcept what it takes from the people, this idea can only mean thatsome communities have a surpluswhich they will share with us herein Rockford. Nonsense! The government takes a quarter toa thirdof what we produce and redistributes .it - and you can be suresome of it sticks in Washington.

The truth is that men andwomen like those gathered herepay all the bills. $6 million wastaken in taxes from us in 1974alone - directly from our paychecks- and this doe'S not countcorporation taxes,excise taxes andproperty taxes which ·we pay in amore indirect way.

And this takes us back to inflation, which I talked about lasttime. It is bad enough to havetaxes so high,but it is even worseto have politicians spend morethan they collect. This year theyare "going in the red" more thanever before in the history of ourcountry, and much of this moneywill be wasted onprojects wecould better handle ourselves.

And how are they going to payfor this overrun? They will bor-

1975 SHOP TALK 527

row as much as they can, andwhen this doesn't make it, theywill "print" money and we willpay for it in higher prices downthe road.

Let me get back to our affairsat Ingersoll- our business continues to do well. This year wewill produce more than last yearin every department and we willmake more money. We continue tomake our deliveries; the productswe have continue to gain acceptance around the world. We have$60 million in the backlog, which,the way we are running now, is agood full year's work; and we havegood prospects beyond that.

There is talk all around us ofother businesses not doing so well.That usually means our work willslow down as well - lateT on.Whether it will happen this timeor not, I do not know. All I knowis we are doing all we can to takeadvantage of every opportunity tosell our machines and so far we'vebe'en successful.

I'm sure you will agree that itwould be foolish if we didn't expect business to slow down basedon what is happening all aroundus. The only thing we- cando aboutit is to perform to the best of ourability in all departments.

We recently received a $10 million order from Caterpillar formachines for a V-8 diesel engine.

This order, in physical units, isnearly as big as the Russian project [machine tools to build dieselengines for trucks]. The last machines will be shipped near theend of 1976. Since the next tenyears will see a big expansion ofdiesel engine production aroundthe world, how we do this job willbe watched by all those in thediesel business.

Incidentally, the Kama Rivermachines for diesel engines arebeing set up in Russia at a veryrapid pace -after a slow start. Sofar our workmanship (even including the job of boxing for shipment by sea) has been given highpraise.

Our order book is not full to theend of 1976 but wehave machinesscattered through the schedule outthat far. We have $29 million ofspecial machines already firmlybooked· for '1976 delivery and thismeans we have a good chance ofhaving a good 1976.

What happens in 1977 is anybody's guess. There is only onething we can do to bring· in newwork and that is to' improve ourquality and our efficiency in everyway possible. If we take cost outof everything we do and if we cansteadily improve on what we sendto our customers, we stand thebest chance of getting whateverbusiness is available.


I hope you will pay attention tothe new look on the bulletinboards.

For some time now - we' havebeen reporting major new ordersand I have been told by many people that this is a good thing to do.

Just recently we started usingthe bulletin boards to tell youabout job opportunities as theyarise in the company. If at allpossible, we want to :fill new jobsat Ingersoll with people who already work here. We' used tohandle this by word of mouth, butthis is no longer sufficient, so weare trying to write up the opportunities as they arise. Keep informed and if you are interested,talk to your boss or go directly tothe personnel department. Don'tbe shy. If the job description lookstough, but you are interested, talkto somebody about it.

Since we started this practice90 days ago, twelve Ingersoll people have taken new jobs as a resultof it. There is opportunity to getahead at Ingersoll.

I have spent some time talking~bout taxes. I did so because wesometimes forget the fundamentaltruth that people who work for aliving pay most of the taxes.Wealthy people pay high taxes but

there is such a small number ofthem that it does not matter in thetotal. People on we1fare, old people, young people, students - donot pay taxes - only people whowork for a living. The direct income taxes from Ingersoll alonelast year amounted to $6 millionand that is repeated in every company this size throughout the land.

Indirect taxes (or less directtaxes. - such as corporation taxes)are also paid by those of us whowork. And yet, all that moneypouring into Washington is notnearly enough. Our governmentwill put us further in debt in 1975- :and then they will cover thisshortfall by printing money, whichwill cause our pay checks to buyless in the future.

Since we are the ones who pay,it has to be up to us to do something about it. If we don't let thepoliticians know what we think,nobody will.

Our business is good. 1976should be another good year. Whatwill happen in 1977 is anybody'sguess.

There is opportunity for advancement at Ingersoll.

Each one of us can· contributetoward keeping the business coming our way by the quality andamount of work we do every day.

~

LUDWIG VON MISES

Wag

Unemployme

and Inflati0:

OUR ECONOMIC SYSTEM - themarket economy or capitalism

- is a system of consumers' supremacy. The customer is sovereign; he is, says a popular slogan,"always right." Businessmen areunder the necessity of turning outwhat the consumers ask for andthey must sell their wares atprices which the consumers can afford and are prepared to pay. Abusiness operation is a manifestfailure if the proceeds from thesales do not reimburse the businessman for all he has expendedin producing the article. Thus theconsumers in buying at a definite

price determine also the height ofthe wages that are paid to all thoseengaged in the industries.

It follows that an employer cannot pay more to an employee thanthe equivalent of the value thelatter's work, according to thejudgment of the buying public,adds to the merchandise. (This isthe reason why the movie star getsmuch more than the charwoman.)If he were to pay more, he wouldnot recover his outlays from thepurchasers; he would suffer lossesand would finally go bankrupt. Inpaying wages, the employer actsas a mandatory of the consumers,

529


as it were. It is upon the consumers that the incidence of thewage payments falls. As the immense majority of the goods produced are bought and consumed bypeople who are themselves receiving wages and salaries, it is obviousthat in spending their earningsthe wage earners and employeesthemselves are foremost in determining the height of the compensation they and those like themwill get.

The buyers do not pay for thetoil and trouble the worker tooknor for the length of time he spentin working. They pay for the products. The better the tools arewhich the worker uses in his job,the more he can perform in anhour, the higher is, consequently,his remuneration. What makeswages rise and renders the material conditions of the wage earnersmore satisfactory is improvementin the technological equipment.

American wages are higher thanwages in other countries becausethe capital invested per head ofthe worker is greater and theplants are thereby in the positionto use the most efficient tools andmachines. What is called the American way of life is the result of thefact that the United States hasput fewer obstacles in the way ofsaving and capital accumulationthan other nations.

The economic backwardness of

such countries as India consistsprecisely in the fact that theirpolicies hinder both the accumulation of domestic capital and the investment of foreign capital. As thecapital required is lacking, theIndian enterprises are preventedfrom employing sufficient quantities of modern equipment, aretherefore producing much less perman-hour, and can only afford topay wage rates which, comparedwith American wage rates, appearas shockingly low.

There is only one way that leadsto an improvement of the standard of living for the wage-earningmasses - the increase in theamount of capital invested. Allother methods, however popularthey may be, are not only futile,but are actually detrimental tothewell-being of those they allegedlywant to benefit.

What Makes Wages Rise?

The fundamental question is:Is it possible to raise wage ratesfor all those eager to find jobsabove the height they would haveattained on an unhampered labormarket?

Public opinion believes that theimprovement in the conditions ofthe wage earn~rs is an achievement of the unions and of variouslegislative measures. It gives tounionism and to legislation creditfor the rise in wage rates, the

1975 WAGES, UNEMPLOYMENT AND INFLATION 531

shortening of hours of work, thedisappearance of child labor, andmany other changes. The prevalence of this belief made unionismpopular and is responsible for thetrend in labor legislation of thelast decades. As people think thatthey owe to unionism their highstandard of living, they condoneviolence, coercion, and intimidation on the part of unionized laborand are indifferent to the curtailment of personal freedom inherentin the union-shop and closed-shopclauses. As long as these fallaciesprevail upon the minds of thevoters, it is vain to expect a resolute departure from the policiesthat are mistakenly called progressive.

Yet this popular doctrine misconstrues every aspect of economicreality. The height of wage ratesat which all those eager to getjobs can be employed depends 011.the marginal productivity of labor.The more capital - other thingsbeing equal- is invested, thehigher wages climb on the freelabor market, i. e., on the labormarket not manipulated by thegovernment and the unions. Atthese market wage rates all thoseeager to employ workers can hireas many as they want. At thesemarket wage rates all those whowant to be employed can get a job.There prevails on a free labor market a tendency toward full employ-

mente In fact, the policy of lettingthe free market determine theheight of wage rates is the onlyreasonable and successful full-employment policy. If wage rates,either by union pressure and compulsion or by government decree,are raised above this height, lasting unemployment of a part of thepotential labor force develops.

These opinions are passionatelyrejected by the union bosses andtheir followers among politiciansand the self-styled intellectuals.The panacea they recommend tofight unemployment is credit expansion and inflation, euphemistically called "an easy moneypolicy."

Credit No Substitute for Capital

As has been pointed out above,an addition to the available stockof capital previously accumulatedmakes a further improvement ofthe industries' technological equipment possible, thus raises the marginal productivity of labor andconsequently also wage rates. Butcredit expansion, whether it is effected by issuing additional banknotes or by granting additionalcredits on bank accounts subjectto check, does not add anything tothe nation's wealth of eapitalgoods. It merely creates the illusion of an increase in the amountof funds available for an expansion of production. Because they


can obtain cheaper credit, peopleerroneously believe that the country's wealth has thereby been increased and that therefore certainprojects that could not be executedbefore are now feasible. The inauguration of these projects enhances the demand for labor andfor raw materials and makes wagerates and commodity prices rise.An artificial boom is kindled.

Under the conditions of thisboom, nominal wage rates whichbefore the credit expansion \veretoo high for the state of the market and therefore created unemployment of a part of the potentiallabor force are no longer too highand the unemployed can get jobsagain. However, this happens onlybecause under the changed monetary and credit conditions pricesare rising or, what is the same expressed in other words, the purchasing power of the monetary unitdrops. Then the same amount ofnominal wages - wage rates expressed in terms of money ~ meansless in real wages - in terms of commodities that can be bought by themonetary unit. Inflation can cureunemployment only by curtailingthe wage earner's real wages. Butthen the unions ask for a new increase in wages in order to keeppace with the rising cost of livingand we are back where we werebefore, in a situation in whichlarge scale unemployment can only

be prevented by a further expansion of credit.

Protracted Inflation

This is what happened in thiscountry as well as in many othercountries in the last years. Theunions, supported by the government, forced the enterprises toagree to wage rates that went beyond the potential market rates,that is, the rates which the publicwas prepared to refund to the employersin purchasing their products. This would have inevitablyresulted in rising unemploymentfigures. But the government policies tried to prevent the emergenceof serious unemployment by creditexpansion - inflation. The outcome was rising prices, reneweddemands for higher wages andreiterated credit expansion; inshort, protracted inflation.

But finally the authorities became frightened. They know thatinflation cannot go on endlessly.If one does not stop in time, thepernicious policy of increasing thequantity of money and fiduciarymedia, the nation's currency system collapses entirely. The monetary unit's purchasing power sinksto a point which for all practicalpurposes is not better than zero.This happened again and again,in this country with the Continental Currency in 1781, in Francein 1796, in Germany in 1923. It is


never too early for a nation torealize that inflation cannot beconsidered as a way of life andthat it is imperative to return tosound monetary policies. In recognition of these facts the Administration and the Federal ReserveAuthorities some time ago discontinued the policy of progressingcredit expansion.

Sound Money Doesn't Cause Slump

I t is not the task of this articleto deal with all the consequenceswhich -the termination of inflationary measures brings about. Wehave only to establish the fact thatthe return to monetary stabilitydoes not generate a crisis. It onlybrings to light the malinvestmentsand other mistakes that were madeunder the hallucination of the illusory prosperity created by theeasy money. People become awareof the faults committed and, nolonger blinded by the phantom ofcheap credit, begin to readjusttheir activities to the real state ofthe supply of material factors ofproduction. It is this - certainlypainful, but unavoidable - readjustment that constitutes the depression.

One of the unpleasant features ofthis process of discarding chimerasand returning to a sober estimateof reality concerns the height ofwage rates. Under the impact ofthe progressing inflationary policy

the union bureaucracy acquiredthe habit of asking at regular intervals for wage raises, and business, after some sham resistance,yielded. As a result these rateswere at the moment too high forthe state of the market and wouldhave brought about a conspicuousamount of unemployment. But theceaselessly progressing inflationvery soon caught up with them.Then the unions asked again fornew raises and so on.

The Purchasing Power Argument

It does not matter what kind ofjustification the unions and theirhenchmen advance in favor of theirclaims. The unavoidable effects offorcing the employers to remunerate work done at higher rates thanthose the consumers are willingto restore to them in buying theproducts are always the same:rising unemployment figures.

At the present juncture theunions try to rake up the oldhundred-times-refuted purchasingpower fable. They declare thatputting more money into the handsof the wage earners - by raisingwage rates, increasing the benefitsto the unemployed, and embarking upon new public works - wouldenable the workers to spend moreand thereby stimulate businessand lead the economy out of therecession into prosperity. This isthe spurious pro-inflation argu-

534 T'RE FREEMAN September

ment to make all people happythrough printing paper bills.

Of course, if the quantity of thecirculating media is increased,those into whose pockets the newfictitious wealth comes -whetherthey are workers or farmers orany other kind of people - will increase their spending. But it isprecisely this increase in spendingthat inevitably brings about a general tendency of all prices to rise.Thus the help that an inflationaryaction could give to the wageearners is only of a short duration.To perpetuate it, one would haveto resort again and again to newinflationary measures. It is clearthat this leads to disaster.

There is a lot of nonsense saidabout these things. Some peopleassert that wage raises are "inflationary." But they are not inthemselves inflationary. Nothingis inflationary except inflation,i. e., an increase in the quantity ofof money in circulation and creditsubject to check (checkbookmoney). And under present conditions nobody but the government can bring an inflation intobeing. What the unions can generate by forcing the employers toaccept ,vage rates higher than thepotential market rates is not inflation and not higher commodityprices, but unemployment of a partof the people anxious to get a job.Inflation is a policy to which the

government resorts in order toprevent the large scale unemployment the unions' wage raisingwould otherwise bring about.

Political Dilemma

The dilemma which this countryand many others have to face isvery serious. The extremely popular method of raising wage ratesabove the height the unhamperedlabor market would have established would produce catastrophicmass unemployment if inflationarycredit expansion were not to rescue it. But inflation has not onlyvery pernicious social effects. Itcannot go on endlessly without resulting in the complete breakdown of the whole monetarysystem.

Public opinion, entirely underthe sway of the fallacious laborunion doctrines, sympathizes moreor less with the union bosses' demand for a considerable rise inwage rates. As conditions are today, the unions have the power tomake the employers submit totheir dictates. They can callstrikes and, without being restrained by the authorities, resort with impunity to violenceagainst those willing to work.They are aware of the fact thatthe enhancement of wage rateswill increase the number of jobless. The only remedy they suggestis more ample funds for unemploy.:


ment compensation and a moreample supply of credit, i. e., inflation. The government, meeklyyielding to a misguided publicopinion and worried about theoutcome of the impending election campaign, has unfortunatelyalready begun to reverse its attempts to return to a sound monetary policy. Thus we are again committed to the pernicious methodsof meddling with the supply ofmoney. We are going on with theinflation that with acceleratedspeed makes the purchasing powerof the dollar shrink. Where will itend? This is the question whichMr. Reuther and all the rest neverask.

Only stupendous ignorance cancall the policies adopted by theself-styled progressives "prolabor" policies. The wage earnerlike every other citizen is firmlyinterested in the preservation ofthe dollar's purchasing power. If,thanks to his union, his weeklyearnings are raised above the market rate, he must very soon discoverthat the upward movement inprices not only deprives him ofthe advantages he expected, butbesides makes the value of hissavings, of his insurance policy,and of his pension rights dwindle.And, still worse, he may lose hisjob and will not find another.

All political parties and pressure groups protest that they are

opposed to inflation. But whatthey really mean is that they donot like the unavoidable consequences of inflation, namely, therise in Hving costs. Actually theyfavor all policies that necessarilybring about an increase in thequantity of the circulating media.They ask not only for an easymoney policy to make the unions'endless wage boosting possible butalso for more government spending and - at the same time - fortax abatement through raising theexemptions.

Duped by the spurious Marxianconcept of irreconcilable conflictsbetween the interests of the socialclasses, people assume that the interests of the propertied classesalone are opposed to the unions'demand for higher wage rates. Infact, the wage earners are no lessinterested than any other groupsor classes in a return to soundmoney. A lot has been said in thelast months about the harm fraudulent officers have inflicted uponthe union membership. But thehavoc done to the workers by theunion's excessive wage boostingis much more detrimental.

It would be an exaggeration to«ontend that the tactics of theunions are the sole threat to monetary stability and to a reasonableeconomic policy. Organized wageearners are not the only pressuregroup whose claims menace today


the stability of our monetary system. But they are the most powerful and most influential of thesegroups and the primary responsibility rests with them.

The Need for Monetary Stability

Capitalism has improved thestandard of living of the wageearners to an unprecedented extent. The average American family enjoys today amenities ofwhich, only a hundred years ago,not even the richest nabobsdreamed. All this well-being isconditioned by the increase insavings and. capital accumulated;without these funds that enablebusiness to make practical use ofscientific and technological progress the American worker wouldnot produce more and better thingsper hour of work than the Asiaticcoolies, would not earn more, andwould, like them, wretchedly liveon the verge of starvation. Allmeasures which - like our incomeand corporation tax system - aimat preventing further capital ac-

cumulation or even at capital decumulation are therefore virtuallyantilabor and antisocial.

One further observation muststill be made about this matter ofsaving and capital formation. Theimprovement of well-being broughtabout by capitalism made it possible for the common man to saVE;and thus to become a capitalisthimself in a modest way. A considerable part of the capital working in American business is thecounterpart of the savings of themasses. Millions of wage earnersown saving deposits, bonds, andinsurance policies. All these claimsare payable in dollars and theirworth depends on the soundnessof the nation's money. To preservethe dollar's purchasing power isalso from this point of view ofvital interest to the masses. Inorder to attain this end, it is notenough to print upon the banknotesthe noble maxim, In God we trust.One must adopt an appropriatepolicy. ~

Reprints of this article available, 10 cents each.

LEONARD E. READ

.The Schoolof Mankind

Example is the school of mankind;they will fearn at no other.

-Burke

THAT SCHOLARLY and brilliantBritisher, Edmund Burke (17271797), assuredly used the term"mankind" as defined in his country's Oxford Dictionary: "Humanbeings in general." Thus, the reference was not to those few whothink for themselves and explorethe Unknown, the ones graced withinsights and who experience intuitive flashes, the moral and intellectual giants, the oversouls, thoselike Confucius, Socrates, Epictetus, Augustine, Maimonides, AdamSmith and thousands of others.Not included in Burke's dictumwere those who rank high in setting examples - the exemplars!Rather, his reference was to thegeneral run of us who learn, if at

537

all, by the example of our superiors.

For the past forty years I havestudied the few - those stalwartspast and present - and observedhow their exemplarity has helpedme to shape my life. They teach bythe high example they set, and welearn by our efforts to do likewise.To the extent that we learn the lessons their examples teach, to thatextent are our own chances of exemplarity improved.

What has been the most rewarding lesson? It is this: individuals,past or present, whom I have ratedas exemplars, have thought .ofthemselves as among "humanbeings in general." Their place inthe elite category has been be-


stowed by others - never self-proclaimed. Indeed, any time any person puts a crown on his own head,he is one. to shun intellectually,never to follow or emulate. Unfortunately for him, he has failed tograsp how infinitesimal is his ownfinite consciousness.

Socrates, reputedly one of thewisest, had this to say: "I knownothing, but I know I know nothing." That great Greek referred tohimself as a philosophical midwife; he was a go-between - seeking Truth on the one hand, sharing his findings with fellow seekers on the other. Socrates wasaware of a simple and self-evidentfact: the more one learns, thelarger looms the Unknown.

The Infinite Unknown

This point is' ea~y to grasp.Merely visualize in the mind's eyea sheet of black, infinite in dimensions - the Unknown. Now whitena small circle to represent yourawareness, perception, consciousness of, say, a decade ago. Nextwhiten a greatly enlarged circle todepict your growth during the pastten years. Observe how much moredarkness you as a learner are exposed to now than earlier. A goodguideline to assess progress: ifdaily the Unknown is not loominglarger, one is not growing.

Many who have delved deeplyinto any subject, be it philosophy,

science, or whatever, are keenlyaware of this point. WarrenWeaver, a distinguished mathematician, generalized the conclusionreached by many thoughtful scientists:

As science learns one answer, it ischaracteristically true that it learnsseveral new questions. It is as thoughscience were working in a great forestof ignorance within which ... thingsare clear.... But, as that circle becomes larger and larger, the circumference of contact with ignorance alsogets longer and longer. Science learnsmore and more. But there is a sensein which it does not gain; for thevolume of the appreciated but not understood keeps getting larger. Wekeep, in science, getting a more andmore sophisticated view of our ignorance. l (Italics mine)

Here we are presented withwhat, at first blush, is a seeminganomaly, namely, the more one isaware of his ignorance the moreis he graced with wisdom. Thesetwo progressions are complementary rather than contradictory.They are twin aspects of man'smost important earthly purpose:growth in awareness,. perception,consciousness. As suggested above,when one is growing, he becomesmore and more aware of his ignorance and this gain in awareness is,in itself, a. gain in wisdom. No

1 See "The Raw Material," Manas(Vol. XXVIII, No.9, February 26, 1975).

1975 THE SCHOOL OF MANKIND 539

better lesson is to be learned inThe School of Mankind!

Parenthetically, it should benoted that there are among us always those I would class as "falseexemplars" - the political charlatans and others who prescribe lifewithout effort, the know-nothingswho promise that they, better thanwe ourselves, can manage our individual destinies.

These "leaders" are the very opposite of exemplars. They are PiedPipers who put themselves in thevanguard of this or that mob. According to Emerson, a mob is "asociety of bodies voluntarily bereaving themselves of reason."

A Personal Approach

My concern is not with mobs andtheir flabby disposition to escapefrom freedom and self-responsibility but, rather, with those individuals who aspire to get everdeeper into life. The human futureis with those whose ambition is toachieve in their own lives, asnearly as possible, man's manifestdestiny!

Very well! Observe the true exemplars and their ways. These alltoo-rare souls have their eyes castonly on their own improvement,not on the reforming of anyoneelse. As a consequence of their adherence to self-perfection, otherswho would improve themselves aredrawn not only to them but to the

light they radiate. To seekers,such enlightenment performs asdoes a magnet.

However, there are and alwayshave been two grades of people:stagnant and growing. There areindividuals who seem to be moreenlightened on this or that subjectthan anyone else. Being furtheradvanced than all others, no moreis required of them, or so theymistakenly conclude. Stagnated!In a word, they crown themselvesand freeze at the level of theirself-professed perfection. Theyfail to grow.

I t is growth in awareness, andthis alone, which energizes thepower of attraction; stagnation atwhatever level has no magnetism!It matters not at what level ofawareness the growth proceeds, beit from a beginner in The Schoolof Mankind or a Socrates. Why?The one who is learning is gracedwith ideas - enlightenments - ne\vto him and very likely new, or atleast refreshing, to those fortunate enough to share his company.

The Power of Attraction

This is a fascinating phenomenon. Magnetism flows behveen theseekers and the givers of light,much as a flash of lightning oscillates between positive and negative poles. The current may begenerated from either directionby the teacher whose light is grow-

540 T'HE FREEMAN September

ing brighter, or by the studentdrawing ever more earnestly fromthe constant light of a greatteacher, perhaps one no longer living. Or, most hopefully, the greatest enlightenment might come asteacher and student grow together.

Many times you and I have saidand heard others say, "I now seewhat you mean." Why not before?Countless reasons range from oneparty's deafness or disinterest tothe other's muteness or monotony.It has been said that repetition isthe mother of learning, but this isnot necessarily the case. Sayingthe same thing over and overthe broken record - is folly. Buttrying to phrase an idea in betterand more interesting style hasmerit not only for the phraser butalso for the one who may be tryingto "see what you mean." Foreverstrive for clarity; first in one'smind and then in expressions andactions.

The seeker after the light oftruth should search in every nookand cranny, for no person knowsbeforehand from what source itmight beam. When he spots it, heshould follow wherever it leads. Ifwe are alert, flashe3 of truth willbe observed emanating from thosepreviously unknown as well as

from the acclaimed elite, fromsometime opponents as well asfrom long-time friends of freedom, from babes to grownups. Letus pray with Cardinal Newman:"Lead, Kindly Light, amid the encircling gloom. Lead Thou me on I"

When devotees of the free market, private ownership, limitedgovernment way of life are chosenas teachers, let orientation be theteachers' aim. Yes, give some samplings of the few lessons well mastered, point out the lodestar - theideal- and let the seekers take itfrom there.The School of Mankindhas given me two reasons for thisconclusion. First, there is noteacher among all who live whoknows all the explanations - evenremotely. And, second, only theseekers can find their way. Noindividual can do it for you or meor anyone else. Each, by the verynature of man, is his own trailblazer.

The School of Mankind 1 Itissues no degrees; there is notenure. Students and teachers leapfrog one another as they advance.No graduation, only daily commencements! And no semesters orset term of years! The School ofMankind is for life - the goodlife! ~

The

Government's

Energy

CrisisEUGENE GUCCIONE

I'VE GOT SOME GOOD NEWS for youabout the energy crisis.

Everything that possibly couldhave gone wrong seems to havegone wrong already. The same institution primarily responsible forour monetary and economic messis also primarily responsible forour energy problems: Government.

I want to emphasize that, regardless of party label, our elected

Eugene Guccione is editor of MINING ENGINEERING, the monthly journal of the Societyof Mining Engineers of AIME (AmericanInstitute of Mining, Metallurgical and Petroleum Engineers); vice president, MountainStates Resources Corp.; and a director of theCommittee for Monetary Research & Education.

This article is based on a talk presented atthe Monex International, Ltd. symposium "TheEconomy in Crisis," June 16, 1975, LosAngeles.

officials and our bureaucrats arenot evil people. They mean well.And it is precisely their good intentions that make our problemsso disastrous. Most of our publicservants are motivated by themessianic impulse of doing good totheir fellow man - and shoving itdown his throat whether he likesit or not. They are full of goodintentions - which they will enforce with a gun at your head.

In fact, without oversimplifyingthe issue, the shortest explanationthat can be given about the energy crisis is that it was triggeredby a good intention and worsenedby the use of force.

The good intention was the no-

541


tion that American consumersshould somehow be entitled tocheap and abundant energy.

The force that was used took theform of government controls overprices.

Controls on Natural Gas

Government planted the seed ofthe energy crisis in the 1930's byforcing price' controls on naturalgas. This action had a disastrousdomino-effect on all competitors ofnatural gas, especially coal.

For one thing, low prices sooncaused shrinking profits in the gasbusiness, thus reducing the capital available for exploration anddevelopment of new gas fields.With fewer new gas fields beingexplored and developed, the reserves of gas have become so depleted that, today, the gas industry can barely sustain 8 years ofproduction.

The coal industry, on the otherhand, unable to compete againstthe government-enforced lowprices of natural gas, has beengoing through 40 years of hell. Atfirst,' the coal industry tried tocompete by concentrating all itsefforts on electrical utilities -historically the largest buyers andusers of coal. But in the 1950's,government again fouled up thepicture: "Nuclear energy is justaround the corner," announced theAtomic Energy Commission. "Wait

one or two more years, and atomicpower will be cheaply available toeveryone," so went the pitch fromWashington.

Electric utilities heard the message, liked it, believed it, andstopped signing long-term supplycontracts with coal companies.However, under Washington'smanagement, nuclear energy tooklonger to become commercial thananybody expected.

At the same time, .the coal industry found itself deprived oflong-term sales contracts, withoutwhich whatever capital could beraised for modernizing old minesand opening new ones suddenlydried up""- and the coal businesswent into another tailspin.

It took the U.S. coal industry 55years to increase domestic coalproduction by about 11 per cent from 568 million tons per year in1920 to today's level of about 630million tons. With such a growthrecord, it· would take a few hundred years to double coal production. Yet, Federal Energy Administration planners think that it can

1975 THE GOVERNMENT'S ENERGY CRISIS 543

be doubled b,y 1985. My personalopinion - based on what government has done and is doing - isthat by 1985 the coal industry mayhave been legislated and regulatedout of existence.

Here are the facts.Twenty eight years ago, in 1947,

U.S. domestic coal production was630 million tons per year - sameas today. When in 1954 the Supreme Court granted to the Federal Power Commission the authority to regulate natural gasprices even at the wellhead, coalsuffered another competitive setback. It was not a coincidence thatcoal production tumbled to 390million tons in 1954.

Federal Intervention

After 1954, thanks to improvedtechnology, the coal industry managed to increase production, andhad again reached the 600-millionton level in 1969 - when Congress,over-reacting to the environmentalhysteria and populist demagoguery, decreased the depletionallowance from 27.5 per cent to 22per cent (thus giving a blow to allenergy industries), and in quicksuccession passed the Mine Healthand Safety Act along with theNational Environmental PolicyAct, and in 1970, the Clean AirAct.

One immediate result of thislegislative orgy was that coal pro-

ductivity immediately fell by 30per cent, and domestic output decreased to 550 million tons in 1970.

There were other consequences.Because the Mine Health and

Safety Act closed several coalmines, those utilities that werestill using coal faced a. severeshortage. The Tennessee ValleyAuthority, for example, was reduced to a 10-day supply of coalfrom a normal 2-month supply. Atthis moment, utilities beganswitching from coal to residualfuel oil.

Everything went wrong in 1970.There wasn't enough residual oileither.

Why?Because just as the low prices of

natural gas had made it difficultfor the coal industry to compete,these low prices also destroyed theprice structure of residual oil,which for some years sold for les~

than the cost of domestic crudefrom which it was derived. As aresult, petroleum companies drastically reduced their production ofresidual oil in order to producemore gasoline to keep up with thedemands of automobiles, which by


law now had to be equipped withantipollution devices that loweredgas mileage by about 20 per cent.This is how the Mine Health andSafety Act was the principal causeof the shortage of coal, of gasoline,and of residual oil - and this ishow, by 1971, in the Eastern Seaboard, from Maine to Florida, webecame dependent on the ArabCountries for more than 94 percent of the residual oil needed forheating and power generation.

When the Arabs formed a carteland jacked up their prices, everybody suddenly discovered the "energy crisis." But that crisis was amade-in-Washington disaster thatbegan at least as early as 1938when Congress passed the NaturalGas Act.

The Arabs didn't cause eitherour energy crisis or our monetaryand economic problems: we weredoing an excellent job of cuttingour own throats long before theArabs set up their cartel.

The Arab oil cartel was set up inOctober 1973. But the Mine Healthand Safety Act, the National Environmental Policy Act, and theOlean Air Act were set up 4 to 5years before. Five years before theArab cartel, Washington set up environmental standards based onwhat turned out to be invalid andgrossly distorted evidence. Congress also armed every environmental nut with the weapon to

destroy, or at least delay, new energy developments.

For example, the KaiparowitsPower Project was originally conceived 12 years ago to deliver 5000Megawatts to users in Utah, Arizona, Colorado and New Mexico.Investment for this project wasestimated at 600 million. Today,because of inflation and all sorts ofbureaucratic delays, this projectnow scaled down to 3000 Megawatts - is expected to cost morethan $2.5 billion. The delays arenow costing $6 million per monthin plant construction alone, plusan additional $363 million annually in our balance of payment deficitto get 33 million barrels of imported oil which Kaiparowits couldreplace.

How did environmentalistsachieve that power?

In the May 1975 issue of Reasonmagazine, R. W. Johnson pointsout that the real culprit in all thiswas Section 102 - the environmental impact statement clausein the National EnvironmentalPolicy Act (NEPA) of 1969.


"Before Senator Jackson's cleverly worded bill, ecologists couldnot, for example, sue the Department of the Interior to stop itfrom selling a federal land lease orgranting permission to build apipeline through federal lands.They could not allege damage tothemselves, so they had no standing in court," says Johnson, adding that, "after the NEPA billwas rushed through Congress onthe tide of emotions and misinformation generated by the SantaBarbara oil spill, anyone - even aRussian agent (or an Arab agent)- by posting a $100 bond couldbring suit in federal court to stopa federal agency from granting operation licenses, leases, use ofhighways, or building permits. Allthe plaintiff has to allege is thatthe agency did not file an 'adequate' environmental impact statement before allowing the businessto proceed."

This is how Washington createdthe machinery that has delayedand even stopped entirely such energy-related projects as the AlaskaPipeline, offshore oil drilling, andthe construction of new refineriesand power plants.

While NEPA has either prevented and/or delayed new projects, the Clean Air Act has had adisastrous effect on existing developments.

According to the Project Inde-

pendence Report, the Clean AirAct - unless repealed or changed- will cause in the next 12 monthsa 200-million-ton coal deficit, theloss of 50,000 domestic miningjobs, an additional $5.5 to $11billion deficit in the balance ofpayments, plus atrocious land useproblems for the disposal of solidwaste from sulfur dioxide scrubbers, and to top it all a 25 per centincrease in the cost of electricity.

What is Washington's solutionto all this?

More regulation, more controls,more new agencies, more bills,more lawyers, more committeesmore scientific illiterates askingthe incompetents to do the unnecessary.

All those guys in Washingtonare not solving the problem: theyare the problem.

Academicians and governmentconsultants are not contributing tothe solution either. I call your attention to the latest masterpiece tocome out from the Ford Foundation's Energy Policy Board. It is a


510-page volume entitled A TimeTo Choose. In it, as a solution tothe energy crisis, the scholars ofthe Ford Foundation are proposing a permanent ban on offshoredevelopment in the Outer Continental Shelf, more severe restraints on the strip mining ofcoal, a moratorium on nuclear power plant construction until at least1985, and what amounts to a defacto nationalization of the oil,gas, and utilities industries.

You know or should know thatnuclear power plants are the safest installations ever built: theirsafety record is unmatched by anyindustry. What about severe nuclear accidents? The probability ofthat happening is even more remote than the probability of ameteor coming from outer spaceand hitting you over the head asyou walk down the street. As toradiation exposure, you are getting more radiation right nowfrom cosmi~ rays and from thewalls of your room - than youwould get by living next door to anuclear power plant, or inside it.

Well, nuclear energy is fairlynew. I can understand why somefolks might feel paranoid about it.But why the opposition to the surface mining of coal, especially ofWestern coal? What's all the fussabout the strip-mining bill?

Here is another story worth telling "like it is."

About Strip Mining

A friend tells me· that some ofthe native tribes in Africa havethe custom of beating the groundwith clubs and uttering spine-chilling cries. Anthropologists call thisa form of primitive self-expression. Americans call it golf. I callit Congress. Uttering spine-chilling cries, Congress began to draftthe Surface Mining Bill six yearsago, according to the slogan: "Ifyou cannot reclaim the land, youcannot mine it." It was a goodslogan. It made sense - but it alsomade the bill utterly unnecessary.Why? Because the mining industry was already doing a good jobof reclaiming. In fact, a study bythe U.S. Bureau of Mines, which Icovered in the October 1974 issueof Mining Engineering, showsthat of the 1.47 million acres usedfor surface coal mining from 1930to 1971, one million acres had already been reclaimed - that's 66per cent. And in 1971, coal peopleactually reclaimed 30 per centmore land than they mined. Alsoin 1971, the entire surface miningindustry reclaimed 80 per cent ofthe land it used. Finally, in spite


of the grim picture of wholesaledevastation allegedly caused bystrip mining, the fact is that onlya small percentage - 0.16 per cent,or less than two tenths of one percent of the total area of the U.S. has ever been disturbed by allkinds of strip mining. Of that, a.lmost half has been reclaimed, andthe rest is in the process of reclamation now proceeding fullspeed.

So, the bill had to be changed.It no longer stated that "if youcannot reclaim the land, you cannot mine it" - it was instead a266-page document, written bypeople who couldn't even spell coal,telling you what type of coal tomine, how and where to mine it,and lhow to reclaim. A majority inCongress voted for the bill.

Support from Universities,Unions and the Industry

Proponents of the bill also wereto be found in universities, in labor unions, and alas, in the miningindustry. Some in our industry actually favored the bill because theyare unhappy about being calledgreedy profit-making capitalists.The fact is that we are in businessto make a profit. Besides, we'll stillbe attacked whether or not wemake a profit; if we make a profit,demagogues will accuse us of stealing from consumers; if we do notmake a profit and must shut down,

the same demagogues will accuseus of causing unemployment.

Anyway, various people in industry, rather than saying "It's alousy bill, it's unnecessary, we arereclaiming, we are doing a goodjob," said instead "let's try tosweeten this bill and live with it."And when President Ford vetoedthe bill, these same people wentaround saying that Congressshould override the veto, otherwise". . . we'll be stuck with a worsebill later on," and that "we canimprove this bilL" But no legislation has ever improved with time.

What about the universities?Well, since the Strip Mining Billincorporated a sweetener granting$120 million of Federal Aid tomining schools, some professorswere in favor of the bill. "Sure, weknow it's a lousy bill," they said,"but look at the goodies we're getting."

What about labor? Well, thereare nine major groups or locals inthe United Mine Workers Unionthree of which are Canadian andcouldn't care less, and six of whichare American and do care very


much because they have a membership predominantly from underground mining. So, UMWU favored the bill: "If we can preventsurface mining," they figured,"more coal has to be mined underground, and that means more money for us."

Let us consider some of thefacts about strip mining:

• In the first place, compared tounderground mining, surface minis much safer: it is 20 times lesslikely to result in the death of aminer.

• Surface mInIng is more efficient: it recovers 80 per cent ofthe coal; and in thick Westernseams, recovery rates can exceed95 per cent. Underground mininginstead recovers approximately 50per cent of the coal. Why, you ask?Be'cause you've got to leave someof that coal in underground pillarsto hold the roof up.

• Surface mining is more productive. In the same amount oftime it takes for an undergroundminer to produce one ton of coal, asurface miner can produce up to20 tons of coal. (Surface miningaverages about 35 tons per manper day; and in the WesternUnited States, it can average up to200 tons. Underground mining instead averages about 11 tons perman per day.)

• Surface mInIng is the onlyway to produce coal from many ofthe vast Western deposits, whichare near the surface and cannot bemined by underground methods.

• Coal in the Western states isclean, it contains from a half toone-tenth the amount of sulfurpresent in Eastern coal. (Westerncoal, on the average, contains 0.5to 0.7 per cent of sulfur. In theEastern underground coal deposits, the average sulfur content isfrom two to ten times greater.)

• Strip mining in the Westernstates would disturb much lessla.nd than strip mining in theEast. "How much less?" you ask.At l~~ast 90 per cent less.

For instance: to produce 30 million tons of coal in the PowderRiver Basin of Wyoming, in anygiven year only 300 acres of landwould be temporarily disturbed.To strip mine 30 million tons ofcoal in a heavily populated statelike Illinois, would disturb 4,500to 7,500 acres of land instead of amere 300. (Mining Engineering,May 1975, p. 35).

• Everybody agrees it would benice to double coal production by1985. If half of the anticipated increase in coal production by 1985comes from the West, it will require the surface mining of only130,000 acres of land. To put this


acreage in perspective, please notice that surface mining representsonly a temporary use of land - andthe 130,000 acres that will bemined and reclaimed over the nextten years is less than the amountof land covered by parking lots inone year. Yet, the Surface MiningBill also granted to the surfacetenant of land on federally ownedcoal a veto power over whether ornot the coal will be mined, and thebill also placed a ceiling uponcompensation - thus removing anyincentive for ranchers to grantyou their consent. This alone wouldhave effectively prevented the mining .of most of our Western coal.

• Finally. The average sellingprice of surface-mined coal f.o.b.mine is $5 to $10 per ton - andthat of underground coal f.o.b.mine is $10 to $20 per ton.

"Why then don't we producemore surface-mined coal?" youask. Consider these reasons:

Coal and uranium are the solution to our energy crisis. Any legislation that adversely affects coalwill also adversely affect uranium.So, with legislation like the MineHealth & Safety Act, the National Environmental Policy Act, theClean Air Act, and some new version of the Surface Mining Bill,the development of coal and uranium will be prevented, the energycrisis will remain - and as long aswe have an energy crisis, all those

bureaucrats in Washington willhave a job fighting the crisis.

Look Not to Washington

In conclusion, the solution to theenergy crisis will not come fromWashington. If we have learnedanything at all, it is this: askingWashington's help to correct aproblem, any problem, is like asking an arsonist to help you put outthe fire. Throwing out the rascalsand voting in a fresh batch isn'tthe answer either.

The only solution to the energycrisis is in a massive program ofderegulating and decontrolling industry. We may survive doubledigit inflation and greater taxation; but unless we regain ourfreedom to produce, the Americaneconomy will reach the terminalstage.

We'll solve the crisis. But government must first get out andstay out of business. The cause ofour energy crisis and shortage offuels is neither geological nor technological. It is political.

Americans are losing the freedom that enables them to createwealth. And the extent to whichgovernment has violated, curtailedand infringed our freedom to explore, to develop and grow, to produce and trade, that is the extentto which our wealth has been diminished and our reserves of fuelsdecreased. ~

ROBERT C. MOORE

A POWERFUL THIRD PARTNER isnow participating in virtuallyevery business in America. Thispartner invests no money and assumes no risks, but threatens toassume more control over businessaffairs than the owners. I'm referring to the Federal government,along with its kissing cousins state and local government. Takentogether they have bound everysector of American life with thousands of laws and regulations.

I am deeply concerned about thecontinued impact of regulationsthat are rapidly destroying theself-adjusting mechanisms thatonce operated so effectively within

From an address given on May 29 at thespring convention of the Pennsylvania PetroleumAssociation by Robert C. Moore, Vice-President-Public Affairs for Cities Service OilCompany, Tulsa, Oklahoma.

550

The Tollwayto Nowhere

the private enterprise system.Sometimes called the eighth wonder of the world, because of thebenefits it has brought to all of us,the American economic machinestill has tremendous potentialbut only if we will limit our tampering with and modifications tothe· basic mechanism.

While it might be satisfying toplace all the blame for excessiveregulation on the shoulders oflegislators and government bureaucrats, the fundamental faultdoes not lie with them, but withan American public that is naiveat best - uninformed at worstabout elementary economic principles and the functioning of themarketplace. Whenever problemsarise, troubled people look to government for solutions, apparently

1975 THE TOLLWAY TO NOWHERE 551

convinced that- there are miraculous remedies stockpiled at thestate capitol or in Washington.So-called progressives who champion such steps ignore the factthat our economic system is alreadybased on one of the most excitingand revolutionary ideas in thehistory of the world. This ideamaintains that a society can bestfunction, prosper and serve thematerial needs of that society onthe basis of free choices by freeindividuals in a free marketplace.

Lack of Understanding

A faulty understanding of economic principles is just one reasonwhy people look to governmentwhen things displease themwhether it's the price of food,utilities or gasoline. Another important reason is our refusal tolearn from the lessons of history.This is really a very strange paradox. If you gave a motorist a roadmap which led him down a deadend road, he would certainly beskeptical of its future value. Afterlosing his way on a second journey,he would unquestionably throwthe map away. Nevertheless, manypeople have a nearly blind faithin the potential of government toguide them safely through complex economic and social difficultiesto a proper destination - despitethe many past failures of bureaucratic solutions!

Many examples come to mind,and I am sure some of you cancite several. For instance, the Interstate Commerce Commission, orICC, was created in 1887 to regulate conditions in the railroad industry. With a stated intent toprotect the public interest withina very narrow framework, the ICCsoon became involved in the settingof rates. In more cases than not,its decisions kept transportationcosts up rather than allowing thedevelopment of efficiencies in operation to produce benefits forconsumers. Under regulation, theresulting decline of competitionamong the railroads made themvulnerable to the challenge ofother modes of transportationsuch as trucks, barges and airplanes. Along came more regulation in the form of the RailwayLabor Act of 1926, which gavelabor unions the power to lock-inpractices that were economicallycrippling - further reducing theirability to compete.

You are familiar with the morerecent chapters of this story. Restrictive regulation and decliningprofits made it difficult for railroads to modernize their operations. Service became so poor thatin 1970 the Rail Passenger ServiceAct was approved, setting up whatis now Amtrak. That governmentoperated system has now beenexempted from some of the rules


that hampered the efficient running of privately-owned railroads.Aided in that way and without thenecessity of generating the earnings or providing the capital requirements that are essential to aprivate corporation, Amtrak hasnow made some progress. Yet, isn'tthat meager consolation as onelooks back upon the havoc that waswrought by regulation? The latestproposals of the ICC would nowjeopardize the more efficient railroads by forcing them to subsidizethose that are failing - a movethat would hasten the completedemise of our private rail system.

Has Government Improved?

Some might suggest that thegovernment has now learned to doa better regulatory job in recentyears. And anyway, a government"of the people" must do a betterjob "for the people." Certainlythese two conditions are impliedin a rising tide of new regulationsand interference in market mechanisms with the primary thrust atpresent against our own industry.

Are you and I really so gulliblethat we will allow such a transparent fraud to be perpetratedupon our industry and the nation'seconomic system to serve the interests of political opportunists,the whims of the uninformed andthe plans of liberal dreamers? Arewe really so unaware of basic eco-

nomics and the complexities of ourmarket system that we will eIll;brace the administrative processesof government bureaucracy tosolve so critical a problemas energy - one that is basic to ourstandard of living and the survivalof our nation? Will we believewhat too many of our legislatorsand others are saying -.- that theycan deliver cheap energy withoutpaying the real replacement cost?It is my fervent hope that we willnot be so gullible, unaware ornaive!

If we are confused today aboutwhether Congress can legislate asolution to market problems, let uslook briefly at their recent effortin the troubled housing industry.(Incidentally, the problems in thatdepressed industry, while substantial, are relatively simple compared to those in the energy field.)

In the recently enacted tax law,the current Congress in its infinitewisdom sought to stimulate thehousing market. This would bedone by giving buyers of newhouses between March 13th andDecember 31st, 1975, a 5 per centcredit up to $2,000 against 1975income taxes. Congress was wellintentioned in this instance because there were 600,000 unsoldnew single-family homes, co-opsand condominiums on the marketand 50,000 mobile homes in inventory. Congress calculated that new


building would not be stimulateduntil this inventory cleared themarket. The solution appearedsimple, and Congress adopted thetax provision without any hearings. The Wall Street Journal saysthis legislative method, i.e., legislation without hearings, qualifies aCongressional action as "bold andimaginative." Whatever else canbe said about this 94th Congress,it certainly qualifies as "bold andimaginative."

It now appears in retrospect thatthe "simple" solution toa "simple"market problem was not so "simple" after all. And remember, goodintentions are not the criteria forsuccess. It now appears that instead of stimulating the housingmarket, this tax change will likelywork in a very perverse manner.Nate the unanticipated "fall-out"from this Congressional effort:

'·A house on which constructionstarts after this past ~arch26th

is not eligible, so builders are nothurrying to build houses that cannot compete with the subsidizedunits. The effect will likely be todelay new starts until late fall.

• The tax measure rewards inefficiency since builders that handled their own problems throughbetter planning, quality construction or more competitive pricingnow find their less efficient andless self-reliant competitors rewarded by Congress.

• Some 300,000 units were underconstruction and contracted, Le.,they were committed for, but notconveyed to the purchaser. The taxbreak is simply a transfer of fundsto these lucky buyers and will notgenerate new housing starts.

• Because units that have beenonce occupied are not eligible forthe tax break, the program distorts buying away from usedhomes, unfairly depreciating thevalue of used homes until the endof the year.

• The tax measure imposes a"confusion penalty" on the housing industry that has real economic costs. It will be months before buyers and builders have aclear picture from Internal Revenue on what is really eligible.There are triple damage penaltiesimposed on sellers for falsification,so they will be understandably apprehensive until the rules areclarified. Buyers who sell oldhomes must take into account anycapital gain they realize, so theymay not get the benefit anticipated. Of course, many buyersprobably will make this discoveryafter the deal on the new home isalready closed. At best, many buyers will also be confused for sometime about the implications ofpurchase.

'. And finally, it has now beenestimated by Congressman Al Ullman, Chairman of the House Ways


and Means Committee, that the taxprovision may result in true additional sales of only 75,000 units atan estimated cost of $600 millionto the taxpayers - or $8,000 peradded home sale. Even by Congressional yardsticks, that must beconsidered something less than abargain for the nation and its taxpayers.

What are the lessons for youand me today from this modernday example of a legislated solution to a market problem? If mycomments to this point have notexcited your interest, I urge younow to take 'a deep breath - andgive your undivided attention tothese truisms I am about to suggest:

Truism #1. It is impossible forgovernment to interfere with abalanced and integrated marketsystem without creating unreasonable distortions, many of whichare invariably counter-productive.

Truism #2. Government solutions frequently rew'ard the inefficient and penalize the productivewhich the market will not allow.While there may be temporarybenefits for some, experience hasproved this process is always anticonsumer in the long term.

Truism #3. Government is subject to the influence of special interests, rewarding those who findpolitical favor and penalizing those

who do not. Reward and cost tothe consumer do not then meet thetest of impartial market discipline- again to the long term detrimentof the consumer.

Truism #4. The intrusion ofgovernment Into the market always creates an enormous "confusion penalty." While you and Imay not always like the disciplinein the market, at least we can relyon the time-tested and consistenteconomic laws by which it operates. What government has manipulated once, it can manipulateagain. More than any other factor,government intrusion into our industry is preventing solution ofour energy problem. In fact, theevidence is overwhelming that suchinterference caused the problem inthe first place. Will we continuethe present confusion or now turnthe problem back to the market forsolution?

Truism #5. Government solutions, when successful, are alwaysextremely costly. Note the $2,000tax break to stimulate one additional housing sale is now likely tocost the taxpayer $8,000 per sale.Some now would have a government oil company created to "compete" with private industry in developing additional energy supplies. Is there a one of us thatreally believes government can dothis job better than private industry? Who can even guess what the


taxpayer will pay per barrel of oilproduced, if this effort comes tofruition? If $600 million to get75,000 new housing starts is an example, the probable cost per barrelof oil found by a government oilcompany will make OPEC members look like pikers!

You're likely asking yourselfwhy the penchant for regulationremains strong despite such a poorrecord. Two of the reasons, a lackof understanding of economic fundamentals and the failure to learnfrom history, have 'already beenmentioned.

There seems to be another reason with more dangerous implications that has been pinpointed bySenator Paul Fannin of Arizona.He maintains that many legislators believe the free enterprisesystem, as we know it, is an outdated 19th century institution. Inthis attitude, they reflect a growing segment in this country whichfeels that industry acting alone,with minimal government intervention, is incapable or unwillingto serve the public interest. This isnot an isolated phenomenon, butseems to be part of an erosion ofconfidence in the validity of manyof the cherished institutions thathave served our nation wellthroughout our history. If timepermitted, we might dwell on theapparent paradox of calls for in-

creased government interventionwhen recent polls reflect a generallack of confidence in the ability ofgovernment to deal effectively witheconomic problems in our society.Could it be that we are just tooimpatient to allow the self-adjusting mechanisms to work? Do welack the wisdom to define whichareas are proper for governmentand which should be left to themarket?

History also confirms that regulation, once created, tends to besubversive, feeding on itself toproliferate and self-perpetuate. Itcreates additional problems anddistortions that need new regulation, and bureaucracy too often becomes an end unto itself.

Unfortunately, for those whoare the victims there is still another force that perpetuates thecult of regulation. Regulations sapthe strength and vitality of a freeeconomy by offering transitorybenefits to consumers and otherspecial interest groups. They offer"security" in exchange for "freedom," and try to substitute"status-quo" for progress. Yes, itis possible for us to be "bought,"and often the price can betempting.

Within our industry there arethose who have profited from theEmergency Petroleum AllocationAct and others who seek to makeit serve their future purposes. As


we have discovered before, however, many a temporary law or taxhas become an institution, andthere are now strong indicationsthat this could be true in thepetroleum industry.

When will we ever learn thatyou can't enact only regulationsthat suit your particular fancy.Once you begin to take the regulatory route, you're on an expressway that leads just one waydeeper into the bureaucratic jungles. To make it even worse, thefarther you travel, the fewer theexit ramps. If you do finally leavethis super highway to nowhere,the journey really can get rough- for you must find your way backto the "go" position if you hopeto travel that old road, again. Thetemptation is great to stay on thehypnotic tollway. For who knows- maybe security is better thanfreedom - and anyway look at howgood our earnings were last year!

I have no easy solutions to theproblems I have been discussing,and we cannot look for any instantrevocation of the thousands ofpages of useless regulations thatare in effect. Perhaps our situationis not totally hopeless, for I believe there are ways to inhibit thecontinued growth of the statutorytumors that threaten our privateenterprise system.

• We must voluntarily work tobecome more responsive to those

we serve than ever before. In asense we must prove to the peoplethat there is no need to bind usheavily in regulations.

• There must he increased emphasis on sound economic education for people of all ages. Wemust supplement the schools of thenation for they can't do this jobalone. You and I spend too littletime discussing the economic factsof life with our children.

• There must be no reluctanceto communicate our views to thegeneral public and lawmakers,even though our opinions may notbe immediately popular.

'.' Businessmen, as private individuals, should evaluate the records of legislators and back thosewho uphold the principles of freeenterprise.

'. By all means we must moveaway from the illusion that themost praise-worthy Congress isthe one that passes the most laws.

'. We must solidify our ownfaith in the laws of supply and demand rather than prematurelycalling for government intervention that is not needed - whetherthis is in our industry or otherfields.

There is still time to get off theregulatory turnpike - but let's notdelay. It gets more expensive everymile we travel, and if we're notcareful, we could miss that lastexit to freedom! ~

BERNARD H. SIEGAN

A STRANGE PHENOMENON of ourtimes is the attitude of local officeholders who identify themselveswith the cause of the poor and atthe same time insist on curbinggrowth. Here in San Diego, for exexample, many politicians whosehearts continually bleed for thedowntrodden are among thestrongest supporters of a restricted growth policy, which canonly be harmful to the poor.

The two positions are totally incompatible, and one begins to wonder how genuine their commitment

Copyright 1975 Bernard H. SieganMr. Siegan is the author of Land Use WithoutZoning and many articles on the subject. Hepracticed law for 20 years in Chicago beforemoving in 1973 to La Jolla, California wherehe is professor of law at the University of SanDiego Law School.

- and to whom or to what. Theanswer may lie, of course, in theworking of both sides of the political street, plying the rich andyoung with "no growth" promisesand the poor with lots of rhetoric.Plainly, these politicians are notheeding the advice of the bumperstickers that urge us to "eschewobfuscation."

Friends of the poor should beworking hard to overcome governmental restrictions that curtailproduction; and some are. Onepublic body that recently adopteda clear position on the issue is theSan Diego County Board of PublicWelfare. On May 2, in a written recommendation to the county'sBoard of Supervisors, it said the

557


slow growth policies of the city andcounty were "at cross purposeswith the goals and objectives of theBoard of Public Welfare."

Its statement continues: "Theelimination of poor or substandardhousing accomodations demandsan immediate change in thecounty's growth policy. This policyis acting to restrict the supply ofhousing available to poor people."

Regarding the means for achieving satisfactory housing for thepoor, the statement discussed bothsubsidized and privately financedhousing and concluded that theformer has not been particularlysuccessful: "It is very expensiveand has served only a small proportion of those in need."

The Board referred to a reportmade by the Federal Departmentof Housing and Urban Development that the average subsidizedapartment unit cost 20 per centmore to construct than a comparable unit privately financed. Thismeant, the Welfare Board reasoned, that 20 per cent fewerdwellings could be built by the government than if the same amountof money had been invested in theprivate market.

It concluded that: "The greatesthope for improving the living conditions of the ill-housed poor inour community, and at the sametime substantially relieving the

financial burden placed on theBoard of Supervisor's budget (andthe taxpayers of San Diego) appears to be through the privatemarket; specifically through thefiltering process."

Filtering is the chain of movesto new or different living quarterstriggered by the construction andoccupancy of a new unit. The leading source available on this processis the study conducted by the Survey Research Center at the University of Michigan, published asa monograph, New Homes andPoor People.

This study, conducted in 17metropolitan areas in the mid1960's, determined that for every1000 new housing units built, thereare over 3500 relocations, of whichan average of 330 are by familiesdefined as poor and 950 by moderate income families, the next lowest economic category. The moveswill be made to presumably betterhousing on the assumption that "ifthey move, they benefit." The Welfare Board considers the filteringprocess "the only proven viableprovider of low cost housing forlow and moderate income families."

According to the Board, thenumber of building permits issuedin San Diego County in 1974 was24,000 fewer than in 1972. Of thereasons cited for the decrease, onewas the restricted growth policy.

1975 LAND USE REGULATION HARMS THE POOR 559

Using the statistics provided inthe Michigan Study, the Board figured that, had this amount of newconstruction occurred, better housing would have been available forover 31,000 poor and moderate income families. By contrast, itpointed out, local government waspursuing the idea of building only600 homes for the needy.

The statement added that agreat deal of pressure for subsidized housing arose from thenotion that "for some reason, poorpeople should live in brand newhouses. The emphasis instead,should be on enabling poor people

The Need for Freedom

to exercise upward mobility by removing the barriers to improvedhousing."

The Board described these barriers as forms of land use andbuilding regulation, specifically impediments to new construction setup by the California Coastal Commission, Environmental QualityAct, zoning regulations, construction processing delays and the substantial fees demanded of buildersto obtain permits.

The Board's analysis powerfullyillustrates how harmful land useregulation is to the well-being oflower income people. ~

IDEAS ON

LIBERTY

To HAVE lived in some remote "native" village long enough to know

how their social curbs on progress operate is to understand why

the best laid plans of economic development schemes have away of failing utterly. Without freedom to achieve and without ameasure of security for life and property, aid is useless; and with

freedom, it is unnecessary. Any enterprising investor is happy to

put his money into a going concern and nothing succeeds like

success. But the rigidities of a managed economy stifle initiative

and scare off venture capital, keeping the depressed area stagnantand backward. Only a rich country can afford the economic inter

ventions of socialism - and they can't afford it for long.EDWARD P. COLESON

Blue Eagles and Deja VuWALTER B. WRISTON

As WE APPROACH the bicentennialof our republic, it is useful to remember that our founding fathersfaced hard times - much harderthan those which are with us today. They, too, had to make sometough choices. Thomas Jeffersonexpressed the problem in a nutshell: "Weare not to expect to betranslated from despotism to liberty in a featherbed."

The great principles of our government laid down by our founding fathers embody a vast distrustof centralized governmental powerand an unswerving dedication tothe proposition that governmentrests on the consent of the gov-

Mr. Wriston is Chairman of the First NationalCity Corporation. This article is from his remarks of May 5, 1975, before The Society ofAmerican Business Writers, Washington, D.C.

For additional copies write to Citicorp Publications Unit, 18th Floor: 399 Park Avenue,New York, New York 10022.

560

erned. No sector of our society hasbeen more vigilant than the pressin keeping that proposition alwaysbefore us. Nevertheless, wheneverwe create the conditions whichcause our system to appear tofalter, whether through inflationor corruption, people who woulddestroy our liberty 'press forwardwith plans the founders rejected- old plans dressed in a new vocabulary. A good many years ago,John Randolph foresaw the dangerand put it this way: "The peopleof this country, if ever they losetheir liberties, will do it by sacrificing some great principle of government to temporary passion."

Today, passions abound in theland. As the heat rises, our memory of fundamentals seems to fade.We forget that the traditional optimism of the American people is

1975 BLUE EAGLES AND DEJA VU 561

an absolute essential to a democracy. We hear a rising chorus ofattack upon the unique Americaneconomic system, through it hasproduced both the highest standard of living and the largest measure of personal liberty in thehistory of mankind.

People who should know betterbegin to waffle about human freedom and in the moment of passionthat John Randolph feared evensuggest that some form of dictatorship may not be so bad afterall. In the 1930s Senator DavidReed from Pennsylvania voiced itbluntly: "If this country everneeded a Mussolini, it needs onenow." The admiration in thel!nited States for the way MussoIini made the trains run on timewas widespread. The New YorkTimes in May of 1933 reportedthat the atmosphere in Washingtonwas "strangely reminiscent ofRome in the first weeks after themarch of the Blackshirts, of Moscow at the beginning of the FiveYear Plan ... The new capital ...presupposes just such a highlycentralized, all-inclusive government as is now in the making." Inthe 1930s it began to look more andmore as if we would sacrifice somegreat principle and lose our liberty.

The resident philosopher inWashington in those days wasRexford Guy Tugwell. Like his

current counterparts, Tugwell expressed contempt for the consumer's ability to choose and wantedlarge state-controlled corporationsalong fascist lines. It was all verysimple and logical. He put it thisway: "When industry is government and government is industry,the dual conflict deepest in ourmodern institutions will beabated." This old idea has nowbeen revived with a name. We nowcall them "benchmark" corporations. By 1984, George Orwell tellsus the concept will be set to musicin a telescreen jingle that goes:"Under the spreading chestnuttree, I sold you and you sold me... "

The NRA

The first major step that thisnation took toward merging government and industry, and towardthe total abandonment of the freemarket system, was the enactmentof the legislation that created theNational Recovery Administration.The NRA with its famous BlueEagle symbol soon began grindingout hundreds of "codes" repealingeconomic freedom and arbitrarilyfixing wages, prices and hours.

In the temporary passion of thatmoment, many businessmen welcomed the idea of controls andwere openly pleased with the ideaof an escape from competition."Codes" in the 1930s were theequivalent of the current euphe-


mism "guidelines." These "codes"ultimately affected some 22 millionworkers. Like all schemes whichrequire people to behave in a waythey would not act of their ownfree will, force eventually has to beused against the populace. Sincethe NRA codes required citizensto make decisions which were conrary to their own economic interests, penalties for noncompliance had to be severe. Tailors werearrested, indicted, convicted andsentenced because their prices forpressing a pair of pants were anickel below the relevant NRAcode. Farmers were fined forplanting wheat that they themselves ate on their own farms. Barbers who charged less than thecode rate for a shave and a haircut were subject to fines of up to$500. Even the village handymanwas prosecuted, since he did notfit in under the multiple wage-andhour scale set up by the codes.

The complexity of the codes soonantagonized labor as well as management. The average factoryworker who had been earning $25a week was cut back to $18.60 under NRA codes. As a result, strikesbecame a way of life and autoworkers, frustrated by red tape,began calling the NRA the National Run Around. When the textilecode authority cut production inthe mills in 1934, another greatstrike began in the South. Before

the strike ended, the NationalGuard had been called out in sevenstates and scores of textile workerswere killed and wounded. A fewmonths later, NRA administratorGeneral H ughie Johnson resignedunder a storm of criticism - or, ashe phrased it himself, "a hail ofdead cats."

The Schechter Case

As was the case with the rightsof minorities in the 1950s and 60s,or with Watergate in the 70s, afew had the courage to challengethe power of the state. A fairlysmall company, The Schechter Poultry Company, refused to observeNRA standards of "fitness" governing the slaughtering of chickens. When the case reached theSupreme Court, the NRA wasunanimously declared unconstitutional. The Court wrote: "Such adelegation of powers is unknownto our law and it is utterly inconsistent with the constitutionalprerogatives and duties of Congress." After the decision wasread, Justice Brandeis told one ofFDR's legal aides: "I want you togo back and tell the President thatwe're not going to let the government centralize everything." Thatwas a call to return to fundamentalAmerican principles.

That time around we were rescued from the temporary passionof the moment by the Supreme


Court. For such actions, the justices were reviled as the Nine OldMen. Fortunately, they were oldenough to remember the tyranniesof the past and struck down theattack on individual freedom, eventhough it was wrapped in a package labeled "progress." As if indirect reference to John Randolph,the Court said: "Extraordinaryconditions do not create or enlargeconstitutional power."

Today, just as we are beginning to win the battle against inflation and recession, the classicattacks on individual freedom arebeing launched with new vigor.In place of the NRA and Musso...,lini's Blackshirts of another era,

.we have new groups with newnames selling the same worn-outconcept of government planning as"progress."

The current effort to peddle thetheories of Tugwell is being quarterbacked by an organization calledthe Initiative Committee for NationalEconomic Planning. Itsmembers, businessmen, academicians and labor leaders, are all wellintentioned people who shouldknow better. Their program,ifadopted, could bring about thestep-by-step destruction of thefree market system and, as a consequence, all personal liberty. Theopening statement of the InitiativeCommittee expresses the usualdoubt about whether our tried and

tested system provides "the besthope for combining economic wellbeing and personal liberty."

Always, Coercion

Like central planners in the past,the new breed speaks euphemistically of "plenary power" and obtaining a "mandate." They suggestthat a "five-year plan" would be"voluntary" but add that it mightrequire a "legislative spur." Theyimply that they would not setspecific goals for General Motors,General Electric, General Foodsor any other individual firm butwould "try to induce" the relevantindustries to do their bidding. TheNe"w York Times, an ardent advocate of central planning in 1975 asin 1933 (except of course for themedia), has fully endorsed theidea of government planning as "ameans to help private industry tomake its own planning decisions ...without government coercion."There is no case of governmentplanning not implemented in theend by coercion.

If the proponents of centralplanning came right out and saidthey wanted to create an economicpolice state, their cause wouldnever get off the ground. So, theyresort to "doublespeak,,, as MarioPei so aptly called it, the usualcamouflage for the ultimate use offorce against the individual. Ludwig von Mises summed it up when


he wrote: "All this talk: thestate should do this or that ultimately means: the police shouldforce consumers to behave otherwise than they would behave spontaneously. In such proposals as: letus raise farm prices, let us raisewage rates, let us lower profits ...the us ultimately refers to thepolice. Yet, the authors of theseprojects protest that they are planning for freedom and industrialdemocracy."

Perhaps the oldest lesson ofhistory is that an assault on one.aspect of freedom is an attack onthe whole, as the framers of theConstitution were well aware. Tothink that the bell that tolls foreconomic freedom does not toll foracademic freedom or for freedomof the press is a delusion, and adangerous one. The vigilance ofthe press which helped smoke outsome of the misdeeds of Watergate should be equally focused onthe economic non sequiturs comingfrom some of Washington's prominent citizens.

Attacks on the system that hasproduced our relative affluence aswell as our freedom come in partfrom people seeking power and inpart from a failure to understandthe American experience. PulitzerPrize historian Daniel J. Boorstinput it this way. "There is an increasing tendency ... to blame theUnited States for lacking many of

the ills which have characterizedEuropean history. Our lack ofpoverty is called materialism, ourlack of political dogma is calledaimlessness and confusion."

All current proposals for a managed economy rest on an underestimation of the intelligence ofthe American people. They assumethat you and I are just not smartenough to decide how to spend themoney we earn. The decision mustbe made for us by a wise government. Those wonderful people whobrought us wage and price controls, which so severely disruptedour economy, now wish to extendthe chaos on a permanent basis.The intellectual arrogance of thosewho would substitute their judgment for that of the Americanpeople is amazing.

Pressures Applied

As the incredible complexity ofAmerican life begins to dawn onthe would-be government managers, as it did in fact ultimatelydawn on the Administrator of theNRA, ever increasing pressure hasto be applied to make a reluctantcitizenry conform. The clash between governmental economic planning and personal liberty is inevitable because, in the end, governmental allocation of economic andintellectual resources requires theuse of force. No agency, for example, could have regulated our


r,a;ilroads into ,bankruptcy as didthe T.C.C.without such power.ThIs 'power must be continuouslyincreased to block opposition, togenerate public acceptance andsuppress doubts about the competence of the planner.

Last year's Economic Summitshould have made it obvious to allthe world that experts do notagree. No plan which covers acontinent with the infinite varietyof America and contains thousandsof parts can possibly be agreedupon by experts and certainly notby a majority of the people. Evenif by some miracle we could getall the fiscalists and monetariststo concur, the ultimate decisionswould be political much more thaneconomic. It would be impossibleto get a majority vote in the Congress on every item in the economywhich would have to be allocated,priced and assigned priority. Sinceboth political and economic agreement is a virtual impossibility,these decisions have to be delegated to the planner and thus cannever represent the will of themajority. Such action by definitiondestroys the premise on whichAmerican democracy rests.

Precious Freedoms

The First Amendment is one ofthe most sweeping definitions offreedom of the citizen against hisgovernment ever enacted any-

where in the world. As in the past,it must now be guarded jealouslyby all sectors of our society. WhatI am suggesting to you today isthat you must examine with greatcare and skepticism the proposition that government regulation ofgoods and services is a legitimatefunction of government. It is predicated upon the dogma that consumers lack the intelligence tomake choices, but that they arecapable of sorting out a good ideafrom a bad one without government help. You should question thelogic which leads some people toconclude that a so-called truth-inadvertising law is good, but atruth in-media law is bad. On apurely logical basis it is hard tosustain the argument that the public is unable intelligently to chooseamong competing dog foods without government help, but is competent to sort out the true meaning of a senator's speech.

The press, along with the restof this country, generally has cometo the conclusion that the performance of government at all levelsleaves a great deal to be desired.Bureaucracy has never been synonymous with efficiency. There isa growing perception across thecountry that government regulation of goods and services hasoften tended to promote monopoly,raise the price levels and smotherinnovation. Professor Houthakker


of Harvard made this point dramatically at the Economic Summitby listing 43 areas he thinks thegovernment should deregulate.

Lest you think that you areexempt, more and more educatorsare beginning to perceive the handof government within their owncampuses, despite the long tradition of academic freedom. Academicians are ·learning the oldlesson that if you take the king'sshilling, you will do the king'sbidding. We already have government very much in the broadcastfield, although some people feelthis has not been objected to asstrongly by the print media as onemight have hoped or wished. Ifyou accept the proposition thatgovernment intervention in thedissemination of ideas is bad,which is one I strongly hold, youmust then review in your own

The Pressure to Succeed

mind whether it makes any senseto argue for governmental intervention in the individual's choicesamong goods and services. Whatever conclusion you come to onthis proposition, you should notfool yourself that economics andpolitics live on separate islands;in tne end our freedom is indivisible.

One of our least admired presidents was characterized as onewho approached power with "muffled oars." Those of you who depend for your existence on theFirst Amendment should sensitizeyour ears to pick up the sound of"muffled oars" seeking to approachpower through a planned economy.This suggestion is in accordancewith sound liberal doctrine as expressed by Woodrow Wilson: "Thehistory of liberty is a history oflimitations of governmental power~not the increase of it." fI

IDEAS ON

LIBERTY

NOTHING IS MORE DANGEROUS to the well-being of a theatre than

when the director is so placed that a greater or less receipt at thetreasury does not affect him personally, and he can live on in care

less security, knowing that, however the receipts at the treasurymay fail in the course of the year, at the end of that time he will

be able to indemnify himself from another source. It is a property

of human nature soon to relax when not impelled by personal ad

vantage or disadvantage.WOLFGANG VON GOETHE,from Eckermann's Conversations of Goethe

ANew KindofPoliticinnDAVID A. WILLIAMS

FIFTEEN YEARS AGO, a well knownSenator in a famous book recommended that future politiciansproclaim this thought in theircampaign speech. "I have little interest in streamlining governmentor in making it more efficient, forI mean to reduce its size. I do notundertake to promote welfare, forI propose to extend freedom. Myaim is not to pass laws, but to repeal them. It is not to inauguratenew programs, but to cancel oldones that do violence to the Constitution, or that have failed intheir purpose, or that impose onthe people an unwarranted financial burden. I will not attempt todiscover whether legislation is'needed' before I have first determined it is constitutionally per-

Mr. Williams is Research and Public RelationsAssistant to the Chairman of the Board ofTexas Steel Comp'any.

This article is from his April 29, 1975 weekly commentary on Newsroom, station KERATV, Dallas.

missible. And if I should later beattacked for neglecting my constituents' 'interests,' I shall replythat I was informed their main interest is liberty and that in thatcause I am doing the very best Ican." Those thoughts, of course,were by Senator Barry Goldwaterfrom his long-time bestseller, TheConscience of a Conservative.

Last year an Independent Libertarian candidate for Assemblymanin New York when asked whatwould he do for the people as theirAssemblyman, answered with"Absolutely nothing." In the 1880'sBucky O'Neill decided to run forprobate judge in Arizona's Yavapai County. His statement read,"To be frank, it is not a casewhere the office is wearing itselfout hunting for a man-not much!Here it is the man wearing himself out hunting the office - for thesimple reason that it is a softberth with a salary of $2000 per

567


annum attached. While in the wayof special qualifications I have noadvantage over 75 per cent of myfellow citizens in the county, yet Ibelieve I am fully competent todischarge all the duties incident tothe offiee in an efficient manner, ifelected. If you coincide in thisopinion, support me, if you see fit.If you do not, you will by no meansjeopardize the safety of the universe by defeating me." Buckywas elected by eight votes.

What do these three politicalcandidates have in common? It isa recognition that politicians hurtthe voter whenever they makecampaign promises. It was SenatorHoward Baker of Tennessee whosaid that whenever he heard a politician making campaign promises,he immediately reached for hiswallet. The truth is that wheneverpromises are made, they must bepaid by our tax dollars. Because ofthis we need a new kind of politician: one who promises not to do

anything for us. This politicianwould recognize that he was beingelected to protect the people fromthe government, not sell away ourpocketbooks. In fact he would behailed as a statesman when reelection time rolled around by using as his slogan "I did nothingfor you last year, and if re-electedI will continue to do the same."Opposing candidates would fightover who could do nothing betterand more efficiently, and the taxpayer would be better off becauseof it. It was Edmund Burke whosaid that the lives and property ofall freeborn Englishmen were injeopardy when Parliament was insession. The same could apply toAmerica. The best thing to happento an American taxpayer would beto have a do nothing Congress. Theless mischief the politicians are in,the better. "And if re-elected Ipromise to continue my traditionof doing nothing to the Americantaxpayer." Amen, Brother, Amen.

t)

IDEAS ON

LIBERTY

Worse Than Thieves

WHEN YOUR MONEY is taken by a thief, you get nothing in return.

When your money is taken through taxes to support needless bureaucrats, precisely the same situation exists. We are lucky, indeed, if the needless bureaucrats are mere easy-going loafers. They

are more likely today to be energetic reformers busily discouraging and disrupting production.

HENRY HAZLITT, Economics in One Lesson

TheG

Fractional-JOE COBB

veBanking

THERE IS LITTLE DOUBT that agold-oriented monetary system issuperior to a fiat monetary system, from the perspecrtive of theaverage citizen and businessman.Monetary systems which are managed by central banks or governments, as opposed to systemswhich arise in the market and areself-equilibrating, are prone to inflation and repudiation. The arguments against "managed" currency are clearly set forth in theTheory 0 f Money and Credit byLudwig von Mises, and it is notour purpose to argue against thegold standard.

The argument of this essay is

Joe Cobb is Chief Budget and Fiscal Officer ofthe Industrial Commission of Illinois. He haswritten a number of articles on economic matters since graduation from the University ofChicago in 1966.

This article is reprinted by permission fromThe Gold Newsletter, Vol. IV, No.6, 1524 Hillary Street, New Orleans, Louisiana 70118.

that the U.S. Dollar should not be"backed" by gold or "tied" to goldor otherwise officially connected togold in any way. The free economymust have a metallic monetarystandard (and gold is probably thebest metaa for that purpose), butthe people who support an Act ofCongress which pegs the price ofgold in terms of dollars, or whichdefines the dollar in terms of gold,are making a big mistake. LikeOedipus, they are putting out theireyes and surrendering their monetary assets to the secret management of the U.S. Treasury without the ability to detect mis-mana.gement. The assumption that agold dollar is not a "managed"currency is an illusion. While itmay be true that the quantity ofmoney may be determined by thestock of gold in the nation at anypoint in time, the total volume of

569

570 TIRE FREEMAN September

credit - including Federal credit,local government debt, and bankcredit - is subject to control andmanagement.

The problem arises because theunit of money (let us can it "onedollar" ion gold) has the same nameand is traded at a fixed price withthe unit of credit (let us call it"one dollar" in deposits). We aUunderstand the process by whichbanks create credit: the depositorbrings in a quantity of gold coinand the banker puts this in hisvault, issuing certificates to thedepositor (or establishing a checking account in his name). At thismoment, the banker has 100 percent reserves for his deposits. Thenext customer in the bank, however, is someone who wants toborrow - let's assume the borrower will buy a· house. The bankeraccepts a secured mortgage fromthe borrower (the banker's non~

monetary asset) and issues to theborrower some certificates identical to the ones pe issued to the depositor. The total number of certificates is now greater than thesupply of gold in the vault, so thehanker's reserves are only a fraction of his total outstanding certificates "payable in gold." Thereis nothing fraudulent about this;the banker's assets equal his liabilities, and everybody knows thatbankers are in business to makeloans with their depositors' money.

Banks perform a valuable serviceby accumulating small depositsand making large loans. It is notour point here to rant and raveagainst fractional reserve banking, but we need to understand thedifference because there is a critic'al implication for any proposalsto reform the monetary systemand re-establish the gold coinstandard.

Most students of economics haveheard of Gresham's Law: "Badmoney drives out good money."What this means is that any holder of both gold coins and .paperdollars will tend to spend the paper dollars and hold on to the goldcoins. He will not spend the goldcoins, unless the seller demandsthem instead of paper ~ The viciousaspect of legal tender laws is thatthey strip the seller of the rightto demand coins instead of paper.Yet, Gresham's law only holds truewhen there is· a fixed price between the "good" money and the"bad" money. When there is afloating price, both forms of money circulate with equal frequencyand the "price" of one in terms ofthe other adjusts according to thedemand. This is a simple phenomenon arising from the two separate uses for money - the mediumof exchange, and the store of valuefunctions. The· gold coins would bepreferred as a store of value, andthe paper dollars would be pre-

1975 THE GOLD STANDARD AND FRACTIONAL-RESERVE BANKING 571

ferred as a m~dium of exchange.If sellers wanted coins instead ofdoUars, they would offer discountsfor payment in gold. These discounts can be observed in everycountry which is experiencing ahigh rate of inflation. A discounton purchases is the same thing asa floating rate between gold andpaper money.

In the United States today, themedium of exchange consists primarily of checks, credit cards, andFederal Reserve Notes. The medium of exchange is entirely madeup of credit. To refer back to thework of Ludwig von Mises, "money" is not in circulation at alleven though many of us are relying on gold as our store of valuealmost exclusively. What circulates is credit certificates, and itis the rapid expansion of creditwhich is causing double-digit inflation.

It is always assumed by advocates of a "gold-backed" moneythat the quantity .of gold ("money") will hold the supply of credit("dollars") in bounds which willprevent excessive credit expansion.I submit that this is a false assumption. It is true that when theruns on the banks begin, the bankers will be exposed to failure anddisgrace; but the bankers aresmart enough to know that thegovernment will rescue them. Thisis why the Federal Reserve Sys-

tem was created. To be sure, maybe we ought to abolish the FederalReserve System and freeze theability of the government to expand the supply of credit.

This is a tall order, and it isdoubtful that those of us withsome knowledge of economics havesufficient political influence to triumph over (1) those who have avested interest in the present system of credit expansion, and (2)the ignorant who would be persuaded by the first group that weare either nutty or evil.

There is, however, a more directand easily achieved solution. Happily enough, also, .the monetaryauthorities are playing into ourhands on this one. The solution involves the utilization of two differently-named units for the twodifferent kinds of financial assets.Let the store of value be knownas "ounces of gold" and let themediurn of exchange be known as"dollars" of credit. Let the buyersand traders in a free market usegold-weight coins for their storeof value. The solution to the problem of inflation, of course, wouldremain putting an end to creditexpansion by the Treasury andthe Federal Reserve System. However this small change in tacticswould make an enormous long-rundifference. It is convenient thatthe Krugerrand is approximatelyone troy ounce because its avail-


ability as an international coinmakes the above proposal eveneasier to implement.

When the unit of credit is calledby the same name as the unit ofmoney ("dollar" for example), thecitizen simply must take the wordof the Treasury that the 'assetsare in the vault and that creditexpansion is not being indulgedin. The indirect consequences ofcredit expansion, such as risingprices for goods and services, occur onJy after a lag in time. Eventhen it is not' always clear whatmay be happening. Aggregatesupply and aggregate demandmove up and down for many diversreasons, and prices adjust accordingly. The political system takesadvantage of this random, or unpredictahle, free market process.The government long ago learnedthat it 'Can increase aggregate dem,and by printing bonds, usingthe bonds as assets against whichto create Federal Reserve Notesand demand deposits in the banking system. As we have observedduring the period since 1967, onthe other hand, the market price ofgold in terms of the unit of creditadjusts to reflect credit expansion.This, then, would be the key to asecure gold coin standard: Thecoins would be measured by theircommon weight, and they wouldcommand a market value in termsof the unit of credit. A policy of

zero credit expansion should bem'andated by law, perhaps, but asa check-and-balance, the tradersin the market would keep theireye on the price of' gold in termsof credit. If the credit price ofgold should rise, there would bestrong and compeHing evidencethat inflation were afoot, unlessproven otherwise by reports ofphysical movements of gold.

With the introduction of weightmeasured gold coins, we mightexpect to see an increasing numberof securities and contracts madein terms of gold-weight coins. Thisshould be encouraged, as a manifestation of the free market principle that people will do what isin their own best interests regardless of government policy.Indeed, the greater utilization ofgold coins will increase the demand of gold assets and improvethe value of private gold holdings(unless the central banks start todump their gold holdings, buteven this should produce only ashort term downward movementand represent an excellent opportunity for private investors tobuy).

Any attempt by the governmentto "fix" the value of the depreciated unit of credit in terms ofgold, however, should be vigorously resisted by anyone whovalues either economic freedomor private gold reserves.

ARE V lEW E R.' S NOT E BOO K JOHN CHAMBERLAIN

"GENTLEMEN," so Sir Isaac New-·ton is supposed to have said whenspeaking of the basic requirementsof a science, "you must describeyour unit."

The trouble with money thesedays is that nobody can describewhat a monetary unit is. Ben Roggesays that "if the dog eats it, it'sdog food." John Exter regardsmost modern currencies as "loweyou nothings." Dogs may eatnothings, but when such a diet iscontinued they demand more andmore as they find themselves wasting away. Food units, even of thestuff t'hey feed to dogs, must be of acertain caloric value, which re-

quires unchangeable units of measurement.

The case for gold - or for someother relatively scarce metal of certain weight and fineness - wouldseem to be irrefutable, yet the politicians and the professoriate continue to turn deaf ears to gold"maniacs" and "fanatics." Theyrefuse to see that all that these"maniacs" are asking for is something that is describable. Otherwise the world must be turned overto guesswork, which means, inpractice, to the speculators.

In a world without monetary certainty· the best minds will go intothe manipulative arts, and produc-

573


tion will inevitably suffer. Thingsmay be fine for the manipulatorsuntil the dogs begin really to starveand go berserk. At a certain pointof canine unruliness the countrythat has left the gold standard farbehind it will discover that it mustgo over to the gun standard, andthen we will have 1984.

We could, if we would listen toreason, avoid the social wreckagethat must come with a final inflationary crisis. The voice of reasonspeaks in Gold IsMoney, a collection of essays edited with an introduction by Hans F. Sennholz(Greenwood Press, Westport, Connecticut). Here we have nine economists addressing themselves tothe plight of a world that is tryingto get along without any standardsof monetary measurement, andthey could bring order out of chaosif there were anybody of influenceto listen. Amusingly enough, thevolume is offered without statingany price on the jacket. Maybe thepublisher is afraid he will take abeating if he takes the current dogfood in payment for· it.

The Plight 01 the Dollar

Much of the hook is historical. Itbegins, however, in medias res withG. C. Wiegand's "The Plight of theDollar," a lugubrious chronicle ofwhat happened in the BrettonWoods post-World War II periodwhen the American dollar dropped

"almost three-fourths of its domestic purchasing power," whilethe various paper currencies in therest of the world "lost, on an average, over 85 per cent of theirvalue."

The U.S. didn't quite cut itselfcompletely from the gold standardduring these years, for foreigngovernments could, up to Augustof 1971, take settlements in gold atthe risk of hurting the ever-enlarging amounts of "Eurodollars"owned by their own citizens. Fearsof triggering a depression kept demand for gold at a minimum, butforbearance couldn't go on forever.So the Bretton Woods era came toan end when Nixon closed the goldwindow, and the dollar witnessedits first devaluation.

The dogs in America during theBretton Woods era thought theywere doing well. They consumedthe available dog food without thesame concern for savings and investment that animated the Germans and the Japanese. Where theAmericans saved six to eight percent of their disposable income, theGermans saved twelve to fifteenper cent, and the Japanese tw'entyto twenty-five per cent.

Compe~ition from Abroad

Somewhere in the mid-SixtiesGermany and Japan, along withsome other countries,began to outproduce the U.S. And our balance-

1975 GOLD IS MONEY 575

of-payments deficits naturally grewslowly and steadily. The "tail of thedog" (a misleading term even fora country on a dog food standard)that is represented by U.S. foreigntrade may not amount to much statistically, but, since it accounts forhuge quantities of fuel and metals,which are basic to a manufacturingeconomy, the dog won't live verylong unless he can wag the foreigntrade tail vigorously.

We are still in medias res withMurray Rothbard's "Gold vs. Fluctuating Fiat Exchange Rates,"Hans Sennholz's· "No Shortage ofGold," and Henry Hazlitt's "To Restore World Monetary Order." WithJohn A. Sparks's "The LegalStanding of Gold - Contract Versus Status," we dip back a bit, tothe world described by Sir HenryMaine, who saw the history .of mankind as a progression from statusto contract. Donald Kemmerer bitesoff the whole nineteenth and earlytwentieth centuries in his "TheRole of Gold in tihe Past Century."Gary North's subject is "Greenback Dollars and Federal Sovereignty 1861-1865." Then we cometo antiquity, real antiquity, withRousas John Rushdoony's "HardMoney and Society in the Bible."The future is left to Arthur Kemp's"Is the Gold Standard Gone Forever ?"which is pessimistic for theshort run but nonetheless remindsus that "forever" is a long time.

I have no real quarrel with thesequence of the essays, but itcould be significant that I foundmyself reading Rousas Rushdoony's' essay on the Biblical laweven before taking on Hans Sennholz's introduction. The Bible, likeSir Isaac Newton, was strong formeasurement. It spoke, in Leviticus 19:35-37, of money not in termsof coinage, but as weight. "Yeshall do no unrighteousness injudgment, in meteyard, in weight,or in measure."

Biblical Standards

The Biblical man who falsifiedmeasures and weights was a "corrupter of judgment," and "vile,wicked and abominable in a veryhigh degree." When David gaveOrnal some money for a place, itwas "six hundred shekels of goldby weight." Biblical law forbade"fractional reserve," and considered any departure from a metallicstandard as "fraud and counterfeiting, and as part of a broaderpattern of apostasy and moral collapse." When, after the fall ofRome and the coming of the DarkAges, the prelates and rulers ofEurope needed money, they werefortunate to have Jewish merchants and money-lenders aroundwho had continued to read the OldTestament.

As long as the nations deal in "IOwe You Nothings," there is a

576 THE FREEMAN

good case for Milton Friedman'schampionship of floating exchangerates. Fixed rates can only resultin black market transactions whenall is guesswork anyway. However,Murray Rothbard really scoreswhen he says "the idea of a marketonly makes sense between differententities, between different goodsand services, between, say, copperand wheat, or movie admissions ...the idea of a market makes nosense whatever between units ofthe same entity: between, say,ounces of copper and pounds ofcopper." When the pound, thefranc, the dollar and the mark oncerepresented certain stated weights,

they were different in name only. Itwould be silly to "float" hasicallyidentical things.

The Friedmanite position makesshort-term sense in a guessworkworld in which some countries maybe inflating their "I Olwe You Nothings" faster than others. But it isno real cure in a world that is unable to invoke a solid unit of measure when dealing with politicians.Hazlitt's prescription is the bestfor the moment: let people owngold and they will soon have a defacto world currency that will begin to call the inflating politicoson the carpet everywhere.

Gold Is Money is available at $11.95 from The Foundation for EconomicEducation, Inc., Irvington-on-Hudson, New York 10533.

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